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STRATEGIC MANAGEMENT
M.Com. (Final)
Developed & Produced by EXCEL BOOKS PVT. LTD., A-45 Naraina, Phase 1, New Delhi-110028
Qklhokn 3
Contents
Chapter 1 Strategic Management – An Introduction 5
Strategic Management
Note: There will be three sections of the question paper. In section A there will be 10 short answer questions of 2
marks each. All questions of this section are compulsory. Section B will comprise of 10 questions of 5 marks
each out of which candidates are required to attempt any seven questions. Section C will be having 5
questions of 15 marks each out of which candidates are required to attempt any three questions. The examiner
will set the questions in all the three sections by covering the entire syllabus of the concerned subject.
Course Inputs
Unit-1 Strategic Management Process: Defining Strategy, Levels at which Strategy operates, Approaches
Unit-2 Environment and Organisational Appraisal: Concept of Environment and its components.
Policies, Financial Plans and Policies, Personnel Plans and Policies, Operations Plans and Policies.
Chapter 1
Strategic Management –
An Introduction
Strategic management is the process by which an organisation formulates its
objectives and manages to achieve them. Strategy is the means to achieve the
organisational ends.
A strategy is a route to the destination viz., the “objectives of the firm”. Picking a
destination means choosing an objective. Objectives and strategies evolve as
problems and opportunities are identified, resolved and exploited.
The interlocking of objectives and strategies characterise the effective
management of an organisation. The process binds, coordinates and integrates
the parts into a whole. Effective organisations are tied by means-ends chains into
a purposeful whole. The strategies to achieve corporate goals at higher levels
often provides strategies for managers at lower levels.
Managers must have strategic vision to become strategic managers and thereby to
manage the organisation strategically. Strategic vision is a pre -requisite of the
strategic managers. Strategic vision implies a profound scanning ability of the
environment in which the company is in i.e., knowing the objectives and values of
the organisation stakeholders and bringing that knowledge into future projections
and plans of the organisation. The managers strategic vision involves:
N큔㢥O༿
P㜴䭹 Q듨䨐R볔䏓
S煦䰪 T䪂 ⹓U퍤⛲V꾘燁W맘㴀
X⹓ᖼ Y骆下 Z깴䍋[67`둢a뚀瘼
bጨᖷ c灄㶩 d
e鑼槓 f The ability to
solve complex and more complex problems;
N큔㢥O༿ P㜴䭹 Q듨䨐R볔䏓
S煦䰪 T䪂 ⹓U퍤⛲V꾘燁W맘㴀
X⹓ᖼ Y骆下 Z깴䍋[68`둢a뚀瘼
bጨᖷ c灄㶩 d
e鑼槓 f The knowledge
to be more anticipatory in perspective and approach, and
N큔㢥O༿ P㜴䭹 Q듨䨐R볔䏓
S煦䰪 T䪂 ⹓U퍤⛲V꾘燁W맘㴀
X⹓ᖼ Y骆下 Z깴䍋[69`둢a뚀瘼
bጨᖷ c灄㶩 d
e鑼槓 f The willingness
to develop options for the future.
Strategic management can be defined as the art and science of formulating,
implementing, and evaluating cross-functional decisions that enable an organisation
to achieve its objectives. As this definition implies, strategic management focuses on
integrating management, marketing, finance/accounting, production/operations,
research and development, and information systems aspects of a business to achieve
organisational success. The term “strategic management” is used at many colleges
and universities as the title to the capstone course in business administration,
“business policy,” which integrates material from all business courses.
The strategic-management process consists of three stages: strategy formulation, strategy
evaluation. Strategy formulation includes developing a business mission, identifying an
organisation’s external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating alternative strategies, and
choosing particular strategies to pursue. Strategy-formulation issues include deciding
what new businesses to enter, what businesses to abandon, how to allocate resources,
whether to expand operations or diversify, whether to enter international markets,
whether to merge or form a joint venture, and how to avoid a hostile takeover.
6 Strategic Management
Although some organisations today may survive and prosper because they have
intuitive geniuses managing them, most are not so fortunate. Most organisations can
benefit from strategic management, which is based upon integrating intuition and
analysis in decision making. Choosing an intuitive or analytical approach to
decision making is not an either-or proposition. Managers at all levels in an
organisation should inject their intuition and judgment into strategic-management
analyses. Analytical thinking and intuitive thinking complement each other.
Operating from the “I’ve already made up my mind, don’t bother me with the facts”
mode is not management by intuition; it is management by ignorance. Drucker says,
“I believe in intuition only if you discipline it. ‘Hunch’ artists, who make a
diagnosis but don’t check it out with the facts, are the ones in medicine who kill
people, and in management kill businesses.” In a sense, the strategic-management
process is an attempt to duplicate what goes on in the mind of a brilliant intuitive
person who knows the business. Successful strategic management hinges upon
effective integration of intuition and analysis, as Henderson notes below:
The accelerating rate of change today is producing a business world in
which customary managerial habits in organisations are increasingly
inadequate. Experience alone was an adequate guide when changes could
be made in small increments. But intuitive and experience-based
management philosophies are grossly inadequate when decisions are
strategic and have major, irreversible consequences.
The strategic-management process is based on the belief that organisations should
continually monitor internal and external events and trends so that timely changes
can be made as needed. The rate and magnitude of changes that affect organisations
are increasing dramatically. Consider, for example, merger/acquisition mania,
hostile takeovers, cellular phones, monoclonal antibodies, fiber optics, the aging
population, taxes on services, computer technology, and the unification of Western
Europe in 1992. To survive, all organisations must be capable of astutely identifying
and adapting to change. The strategic-management process is aimed at allowing
organisations to effectively adapt to change over the long run.
In today’s business environment, more than any preceding era, the only
constant is change. Successful organisations effectively manage change,
continuously adapting their bureaucracies, strategies, systems, products,
and cultures to survive the shocks and prosper from the forces that
decimate the competition.
Information technology and globalisation are environmental changes that are
transforming business and society today. On a political map, the boundaries between
countries are as clear as ever, but on a competitive map showing the real flows of
financial and industrial activity, the boundaries have largely disappeared. Speedy
flow of information has eaten away at national boundaries so that people worldwide
readily see for themselves how other people live. People are traveling abroad more;
ten million Japanese travel abroad annually. People are emigrating more; East
Germans to West Germany and Mexicans to the United Stares are examples. We are
becoming a borderless world with global citizens, global competitors, global
customers, global suppliers, and global distributors!
The world is changing, and businesses must adapt to these changes or face
extinction. The need to adapt to change leads organisations to key strategic-management
8 Strategic Management
questions, such as: What kind of business should we become? Are we in the right
fields? Should we reshape our business? What new competitors are entering our
industry? What strategies should we pursue? How are our customers changing? Are
new technologies being developed that could put us out of business?
The history of business and industrial management is one of decision-making
under ever increasing environmental turbulence. At each phase of such turbulence,
management practices have been developed to successfully meet the impacts of the
environment. The evolution of management from budget-based management to strategic
management through corporate planning, long-range planning, strategic long-range
planning, and strategic planning is a continuous picture of this development process.
Effectiveness
of strategic
decision-making
* Multi-year budgets
5888 Well-
defined strategic
framework
5889 Strategical
23 Thorough
Increasing
ly focused
* Gap analysis situation analysis and organisation
* Static allocation of competi-tive 5890 Widespread
resourees assessment strategic thinking
24 Evaluation capability
Annual budgets of strategic 5891 Coherent
alternatives reinforcing management
25 Dynamic processes
* Functional focus allocation of 5888 Negotiation of objectives
resources 5889 Review of progress
5890 Incentives
5892 Supportive
value system and
climate
TIME
Phase 1 Phase 2 Phase 3 Phase 4
Financial planning Forecast based Externally oriented Strategic Management
Value system planning Planning
* Meet budget * Predict the future * Think strategically * Create the future
Slow
2 1
Transitional Stable
Environmental
Changes
Turbulent Unstable
3 4
Fast
High Low
Management Control System
Budgeting
Budgeting is best understood in the context of time of development and use. In its
early manifestation, a budget can be regarded as primarily a plan to reach a goal or
objective and is perhaps best defined as a basic planning and control system.
In its later manifestation, budgeting forms a part of the strategic planning
process, unlike the earlier manifestation when budgeting and budgetary
management constituted a ‘stand alone’ planning and control system.
Budgeting is, in fact, a tool for running the activities of a firm systematically. It carefully
looks at the resources available or within reach, decides upon the allocation of these
10 Strategic Management
Operational Capital
l Production budget l Capital expenditure
l Inventory budget l Allocation of funds
l Direct labour budget l Management of funds
Budgetary Control
Since the objective of budgeting is to monitor and control the performance of the firm,
the first step is to determine budget figures. Efficiency standards with regard to all the
activities enumerated above are implicit in the budgetary projections. The estimated
productivity figures are commonly based on standards of performance either derived
from historical observations or computations from the firm’s internal data, or from
figures obtained based on financial statements of competitors (inter-firm comparisons).
Other approaches are to base these on predetermined performance standards or from
negotiations conducted within the management by objectives (MBO) framework.
For control purposes, it is not enough to evaluate the budget figures carefully. As Ackoff
puts it, ‘control is the evaluation of decisions after they have been implemented. It
involves predicting the outcome of the decisions, comparing of it with the actual
outcome, and taking corrective actions when the match is poor’. In a budgetary control
system, the budgets are the predictions of the outcome of the contemplated decisions.
The actuals are plotted against the budget. The differences are the variances, and
corrective actions are taken when the variances are large and significant.
Financial Control
Like budgets and budgetary control, financial control operates using monetary
figures. Initially designed to manage and control cash, it now provides the basis
for control of many other functions. To enable financial control to be better
utilised, any economic entity/corporation is usually subdivided into well-defined
segments with clearly defined scope of activities entrusted to responsible
individual managers. These become responsibility centres, and depending on the
nature of the functions, are called costs centres, expense centres, activity centres,
revenue centres, profit centres, investment centres, and the like.
The financial control system is built around a rather small number of key variables
which, when carefully monitored, allow managers to track over a stipulated period the
performance of the various functional activities and business units of the firm. These
indicators are derived from the basic information compiled for assembling the budget.
A valuable tool in exercising financial control is the use of financial ratios both for
assessment of the company’s own financial performance and status, as also to compare
them with similar companies. These ratios are divided into the following major groups:
0 Liquidity ratios
1 Leverage/capital structure ratios
2 Profitability ratios
3 Turnover ratios
12 Strategic Management
The major weakness of budget and budgetary control is their short time horizon. In
the scenario in which it was originally initiated, the environment was comparatively
less turbulent, and competition was less intense. It seemed adequate to look after a
particular year’s business and performance. References to a possible change in
direction in future, capital investment spreading over successive years, easing out of
weakening activities etc. were comparatively less important, if not considered
entirely irrelevant in the context of Budgetary Control. Refixing budgetary figures
ab initio each year was also considered unnecessary. It was enough to build on
previous years’ figures, suitably adjusting and updating these.
With years, both environmental turbulence and competitive pressures have increased
significantly. Short time-span budgetary control was no longer considered adequate. A
much longer horizon began to be considered necessary not only for a firm’s well-being,
but even for its survival. As a logical corollary, corporate planning supplanted budget
and budgetary control as a basic tool for planning and monitoring a firm’s performance.
Budgeting did not, however, lose all its relevance. With corporate planning and strategic
planning as a later development, budgeting and budgetary control became the principal
arm of action plans at the implementation and control stages. A new approach to
budgeting required the use not only of historic data but, for the establishment or
emergence of commitments arising out of the strategic or corporate plan, it also called
for negotiations conducted within the framework of management by objectives (MBO).
Meanwhile, the very process of budget preparation has gone through stages of
refinement. New concepts have been introduced. These include the concept of flexible
budgeting which permits the original standards used to measure performance to be
modified with changes in the actual level of operations. Similarly Zero-Base Budgeting
(ZBB) establishes a set of very comprehensive rules to force managers to justify their
budgetary allocations from base zero, rather than defining the new budget incrementally.
Resort to financial measures and a total preoccupation with budgetary control for a
particular year has left managers overly preoccupied with profitability as the key
criterion for measurement of the firm’s and hence their own performances. This trend
has, however, continued into the corporate planning phase, when ROI has tended to
become the all important preoccupation of management. The result has been that too
many firms have, in their preoccupation with ROI, inadvertently weakened their asset
base and discouraged necessary investments by compromising the long-term competitive
standing of the firm in exchange for a hefty ROI for the following year. The peculiar
standing of executive management with shareholders in many countries, together with
the behaviour of the share market where immediate profit-taking becomes the all
engrossing consideration as also taxation policies of many governments discouraging
capital gains, has only encouraged this tendency. Indeed, an immediate sure return
versus long-term risk of increased return and growth tended to dichotomize management
attitude and policy, as also the government attitude in many companies and states.
Firms which depend entirely on budgetary and financial control measurements for
planning purposes are exceedingly vulnerable to falling into the near-sighted ROI traps.
Unless these are clear articulations of the business ’s competitive spirit and strategy,
properly understood at all organisational levels, a pure budgeting and financial control
system will prove inadequate in warding off undesirable consequences.
Strategic Management – An Introduction 13
Corporate Planning
To assist a sharp definition and consideration of the Corporate Planning Process,
we refer to Exhibit 1.3. The explanation of the steps follows.
Objectives
Before discussing the planning process and the objective setting, a few factors
perhaps justify early consideration and emphasis:
short investment horizon, therefore, a three year planning horizon is also in practice.
0 A corporation is a purposive organisation, and it is evident, therefore, that
efficient utilization of the resources at its disposal towards fulfilment of its
objective(s) should be its purpose.
This brings us squarely into the arena of objective setting,. The setting up of
objective(s) is not however, an ad hoc decision, but the culmination of a process.
It would perhaps be useful at this stage to consider this entire process.
14 Strategic Management
Secondary Objectives
Secondary objectives are descriptive and attempt to set out the key elements of
the business of the future. These examine the nature and scope of the business,
the geographical sphere of operation, and some of the key factors about the
company. These include statement of the way the company intends to conduct its
relations with its employees, customers, and society, as also the concept of moral
and ethical standards it proposes to adopt.
Also part of the secondary objective is that the company’s attitude to technology,
in the context of the business it is in, is stated unequivocally.
Strategic Management – An Introduction 15
Goals
If we regard objectives as the map reference, goals may be considered to be the
landmarks and milestones that the firm must pass as it progresses along the
chosen route.
In effect, a network of goals provides a model of the company’s strategy over the
whole period of the plan. Some possible definitions or measures of goals would be:
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ0 Percentage market share (by
products and/or country).
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ1 A ratio, such as return on sales.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ2 An absolute figure for sales.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ3 A minimum figure for customer
complaint.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ4 A maximum figure for hours
lost in industrial disputes.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ5 A labour productivity ratio.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ6 Total number of employees.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ7 A maximum employee
‘wastage’ rate.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ8 A standard cost.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ9 A cost reduction target.
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ10 A date by which a particular event
must take place (e.g. a new product launch).
ȀĀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀȀĀȀ⸀ ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀ11 Quantified
values of some of the financial ratios would also constitute measures and
definitions of goals.
Standards of Performance
Standards of performance are essentially derivations from goals. While a goal is a
corporate, divisional or departmental target, a standard of performance is something
which is individually assigned to a named person. Some times the personal standard
may be something which is coterminous with the corporate goal. For instance, a
market share goal may be assigned to the product manager responsible. Sometimes
the standard may be something derived from the goal: splitting up the corporate
target and making individuals responsible for each segment (for instance the
personal sales target assigned to a representative). Frequently, these are time-
assigned tasks. The overall concept may be visualised as a network of targets, all
interlinked in some way to the company’s primary and secondary objectives.
The importance of personal standards is that they provide a tool for ensuring that
plans are converted into tasks people can perform. A direct link is thus established
between the task of the individual persons and the total corporate strategy.
It is also important to realise the relation between the system of personal
standards, as briefly described above, and the technique of ‘management by
objectives’ (MBO) developed by Humble Personal standards as a system is
essentially a simple variant of MBO, although its aims are narrower.
The Appraisal Process
It has already been briefly mentioned how the comparatively stable technology base
accompanied by an unstable, indeed turbulent, environment in the corporate segments
16 Strategic Management
gave rise to the felt need for formalized or informal environmental scanning.
Also, the plan is a projection of the company’s performance and expectations
into the future based on the planned strategy. Essentially, therefore, the appraisal
process consists of the following major elements:
l External appraisal Together comprising
l Internal appraisal environmental analysis
0 SWOT analysis
1 Gap analysis
2 Forecasting
Environment monitoring and analysis can perhaps be depicted in a concentric
diagram (Exhibit 1.4). In Exhibit 1.4, everything except the internal environment
is a constituent of the external environment.
Internal Appraisal
It is basically to evaluate the firm’s own capacities and to meet the requirements of existing
activities efficiently and effectively; and also to meet the challenges or threats indicated on
the basis of external appraisal. It further identifies the strengths, weaknesses, and resources
of the company keeping the objectives, the external environment, and the forecast in view;
the strengths to be utilised, the weaknesses to be corrected.
It is important to realise that although there is interrelationship between internal
appraisal and environment analysis, the two are really different and isolated from
each other. In effect, internal appraisal is best done against the background of
environment analysis. A number of basic concepts should be borne in mind as
the appraisal progresses, and performance rated against then.
0 It should always be assumed that there might be a better way of doing
something until the contrary is proved.
Strategic Management – An Introduction 17
5888 It is usually a relatively small amount of effort that produces most of the returns.
Usually, around 80 percent of the profit comes from, say, 20 per cent of effort, the
remaining 20 percent requiring the balance 80 percent effort. Any action that
reduces the amount of less profitable action should lead to corporate
improvement. This, in effect, is an illustration of the ‘Pareto Principle”.
5889 Often knowledge of what is being done is not as perfect as managers
within a company believe. One of the tasks of corporate appraisal should
be to ascertain the facts.
5890 When what is being done has been established, the question why should be asked.
5891 The future is more important than the present where the trends and effects
on the aspects studied can be foreseen.
5892 The appraisal should cover all aspects of the company.
The following factors should be considered as part of the internal appraisal:
23 Trends of results: For example, trends in profits, sales, capital
employed, and the various commonly used ratios. This will show whether
the company is improving or worsening in its performance.
24 Sources of profit: This analysis should be mostly marketing oriented.
25 Risk: Arising from such factors as the bulk of profit coming from a single
product, over-dependence on a single market, too few customers for a product,
raw materials difficulty varying from difficulty of supply, duty, shortage, to over-
dependence on one supplier, other market risks, technological risks not only in
product obsolescence but in production processes, etc.
26 Manufacturing activity: The purpose being production cost reduction,
consideration of the process should include, apart from the manufacturing process,
plant and equipment appropriateness and efficiency, correct labour deployment and
efficiency, also the raw materials, the standards set for their purchase and the
efficiency of the company as buyer (skills, technology absorption creation).
27 Rationalisation of resources: This involves rationalisation relocations of
facilities, plants and building, distribution depots, supply and demand patterns, etc.
28 Organisation and management structure: This involves studying
the basic organisational structure, assessment of managerial capabilities,
the company’s labour relations, company’s relation with its trade unions,
morale of employees, corporate motivation, etc.
29 Financial resources: Study of the company’s liquid resources and
expected future cash-flow position.
30 Corporate capability: This is brought out in the analysis of the
company’s synergy structure.
31 Systems: This would involve assessment of the formal and informal systems
and communications, authorities and participation within the company.
32 Use of resources: This essentially involves a study of allocation of resources
between the products and a comparison of this with their real profit contribution.
Resources here mean not only money, building, and plant, but also what are
18 Strategic Management
External Appraisal
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⾠ǎοРРȼDłؿCǀNj
⾠ǎοРРȽDłـCǀNj
⾠ǎοРРȾ8Ҳف#䄄
Ħο ȿ8Ҳق#䄄ħο ɀ8Ҳك#䄄Ĩο Ɂ8Ҳل#䄄ĩο ɂ8Ҳم
#䄄Īο Ƀ8Ҳن#䄄īο Ʉ8Ҳه#䄄Ĭο Ʌ8Ҳو#䄄ĭο Ɇ8Ҳ
ى#䄄Įο ɇ8Ҳي#䄄įο Ɉ8Ҳً̀#䄄İο ɉ8Ҳٌ̀#䄄ıο Ɋ8Ҳ
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⾠ǎοРРɏDłْ̀CǀNj
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٫#䄄Ōο ɩ8Ҳ،#䄄ōο ɪ8Ҳ٭#䄄Ŏο ɫ8Ҳٮ#䄄ŏο ɬ8Ҳ
Customer environment: The scanning should include the following:
l Tracking customer complaints and compliments.
l Monitoring return rates.
0 Listening to customer needs and concerns.
1 Extent of quality improvement/maintenance/deterioration as reflected
in customer reactions.
2 Extent of competitive pressures from possible substitutes, as reflected
in customer reaction.
1 Competitive environment: Surveillance of competitive environment
should include consideration of:
0 Competitor profile.
1 Market segment pattern.
2 Trend in market shares.
3 Research and development trends.
4 Emergence of new competitors.
5 Threat through possible emergence of new substitutes.
2 Industry environment: Industry environment monitoring should include
the following:
0 Structure of the industry.
1 How is the industry financed.
2 Changes in the degree of government regulations.
3 Changes in the typical products offered by the industry.
4 Changes in typical industry marketing strategies and techniques.
Strategic Management – An Introduction 19
Forecasting
As corporate planning extends to a firm’s activities into the quite distant future,
perhaps five years or so, it will be realised that there is need for forecasting of
sales into these years. These forecasts of the product or industry sales and the
deductions from these of the company’s expected sales or planned sales would
determine the planning of resources.
These forecasts may be of products already on sale production by the company; products on
the same or similar lines which the company may take up, products currently in the research
and development stage, or products the company may take up for diversification. Depending
on the status of the product vis-a-vis the company’s actions, plans or intentions, the forecasts
would extend to or extend over varying time periods into the future. Also, an exact
knowledge of the product attribute will vary accordingly.
All forecasts project into the future and hence are subject to uncertainty. The
degree of uncertainty depends considerably on how far into the future the
forecast extends and the status of knowledge of the product attributes.
Before discussing forecasting methods, however, it is important to emphasise the
difference between forecast and market share. Forecast is directly a projection of
anticipated sales. It is thus independent of how the market itself grows or
changes. Market share is a derivative of the combined effects of sales forecast
and change in the volume of total market. Market share is an important driver
for the process of strategy formulations.
All products usually go through a life cycle with a general shape such as that
shown in Exhibit 1.5.
It is easy to realise that for any sales forecast of any existing product it is
important to find out the phase of the product life cycle that the product is in.
There are, however, three difficulties, namely
0 Determining the phase the product is in.
1 Determining the duration of the various time phases— which are
dependent on many external factors.
2 Actions which can be taken by the company to extend and modify the life cycle.
20 Strategic Management
Time
Exhibit1.5:TheProductLifeCycle
Forecasting Methods
1. Statistical Projections
This methodology is based on past data and can assume increasing sophistication
as follows:
Trend Analysis
0 Simple growth pattern
This is quite useful for short-term forecasts, say for instance, for a few
months, particularly to gain a perspective of the future prospects.
This method is based on the average annual growth rate, calculated over a
period, worked out simply by expressing the latest year as an index of the
earliest and correcting out for the erratic factor.
1 Moving averages
In it the seasonal or cyclical pattern is eliminated by obtaining a smooth
underlying trend for twelve months. Then, for each advancing month or quarter,
etc. the data for the same period is added and the data for the corresponding period
at the tail end is eliminated and a fresh trend line is worked out.
2 Exponential smoothing
This method is in concept the same as moving averages, except that the average is
exponentially weighted so that the more recent data is given a greater weightage,
and the past forecasting error is taken into account in each successive period.
3 Mathematical trends
Mathematical trends are methods in which a mathematical fit is used to
express the past data. Some of the methods of using mathematics with
increasing complexity are as follows:
l Simple regression model
Strategic Management – An Introduction 21
1 Econometric Models
In this method, the dependent variable is expressed through a system of equations
involving several independent variables, themselves dependent on one another.
Thus for example, the interdependencies of the dependent and independent
variable may take the following form:
Sales = f (GNP, Price, Advertising)
Production cost = f (Number of units produced, inventories, labour costs,
material cost)
Selling expenses = f (Advertising, other expenses)
Advertising = f (Sales )
Price = f (Production cost, selling expenses, administrative overhead,
profit)
In econometric models, we are faced with many tasks similar to those in
multiple regression analysis. These tasks include:
22 Strategic Management
0 Marketing judgements
There are many occasions where little or no data exist on which to base a
forecast of a product or environmental event, but where the knowledge of
the company’s employees can be called upon, or when common sense can
be used to forecast bands of possible results based on some other data.
Indeed, this can be further refined to quantify ‘judgement’ by building a
subjective demand curve. Its accuracy may be questioned, but its
usefulness, in the absence of any constructive alternatives is underiable.
4. Technological Forecasting
This is useful for forecasts for the comparatively distant future. Indeed, the term
‘technological’ forecasting is rather loosely formulated, since it may be used to
forecast not only a technology but also matters of nontechnical interest.
Since it is a forecast of a comparatively distant future, the uncertainty surrounding it is
consequently greater. A technological forecast should therefore not usually be a prediction of
what will happen, but of what is possible and what can be made to happen. It is thus a guide
to catalyse strategic leadership vision rather than an operating methodology.
When technical, it often provides a guide to action on what can be made to
happen and serves as an invaluable aid to a visionary strategic leader and
decision-maker in times of discontinuity.
Mission Statements
Mission statements are “enduring statements of purpose that distinguish one
business from other similar firms. A mission statement identifies the scope of a
firm’s operations in product and market terms.” It addresses the basic question that
faces all strategists: “What is our Business?” A clear mission statement describes the
values and priorities of an organisation. Developing a business mission compels
strategists to think about the nature and scope of present operations and to assess the
potential attractiveness of future markets and activities. A mission statement broadly
charts the future direction of an organisation.
the future. Opportunities and threats are largely beyond the control of a single
organisation, thus the term “external.” The computer revolution, biotechnology,
population shifts, changing work values and attitudes, space exploration, and increased
competition from foreign companies are examples of opportunities or threats for
companies. These types of changes are creating a different type of consumer and
consequently a need for different types of products, services, and strategies. Other
opportunities and threats may include the passage of a new law, the introduction of a
new product by a competitor, a national catastrophe, or the declining value of the dollar.
A competitor’s strength could be a threat. Unrest in Latin America, rising interest rates,
or the war against drugs could represent an opportunity or a threat.
A basic tenet of strategic management is that firms need to formulate strategies
to take advantage of external opportunities and to avoid or reduce the impact of
external threats. For this reason, identifying, monitoring, and evaluating external
opportunities and threats is essential for success.
Long-term Objectives
Objectives can be defined as specific results that an organisation seeks to achieve in
pursuing its basic mission. Long-term means more than one year. Objectives are
essential for organisational success because they provide direction, aid in evaluation,
create synergy, reveal priorities, allow coordination, and provide a basis for effective
planning, organising, motivating, and controlling activities. Objectives should be
challenging, measurable, consistent, reasonable, and clear. In a multidivisional firm,
objectives should be established for the overall company and for each division.
Annual Objectives
Annual objectives are short-term milestones that organisations must achieve to reach long-
term objectives. Like long-term objectives, annual objectives should be measurable,
quantitative, challenging, realistic, consistent, and prioritised. They should be established at
the corporate, divisional, and functional level in a large organisation. Annual objectives
28 Strategic Management
Policies
The final key term to be highlighted here is policies—the means by which
annual objectives will be achieved. Policies include guidelines, rules, and
procedures established to support efforts to achieve stated objectives. Policies
are guides to decision making and address repetitive or recurring situations.
Policies are most often stated in terms of management, marketing, finance/accounting,
production/operations, research and development, and information systems activities.
Policies can be established at the corporate level and apply to an entire organisation, at
the divisional level and apply to a single division, or at the functional level and apply to
particular operational activities or departments. Policies, like annual objectifies, are
especially important in strategy implementation because they outline an organisation ’s
expectations of its employees and managers. Policies allow consistency and coordination
within and between organisational departments.
Levels and Approaches to Strategic Decision Making 29
Chapter 2
Levels and Approaches to Strategic
Decision Making
The definitions of strategy, varied in nature, depth and coverage, offer us a
glimpse of the complexity involved in understanding this daunting, yet
interesting and challenging, concept. In this section, we shall learn about the
different levels at which strategy can be formulated.
Levels of Strategies
The strategic planning process culminates into formulation of strategies for the
organisation. A business strategy must contain well-coordinated action programs
aimed at securing a long-term competitive edge and which should be sustained
by the company (Refer Exhibit 2.1)
Exhibit2.1:LevelsofStrategies
Corporate Level
In an organisation, there are basically three levels. The top level of the organisation consists
of chief executive officer of the company, the board of directors, and administrative officers.
The responsibility of the top management is to keep the organisation healthy. This implies
that their responsibility is to achieve the planned financial performance of the company in
addition to meeting the nonfinancial goals viz. social responsibility and the organisational
image. The issues pertaining to business ethics,
30 Strategic Management
integrity, and social commitment are dealt with, at this level of strategic decisions. The
corporate level strategies translates the orientation of the stakeholders and the society
into the forms of strategies for functional or business levels (Refer Exhibit 2.2).
Corporate Level
of Strategies
Corporate Level
Operational Level
Business Level
This level consists of primarily the business managers or managers of Strategic Business
units. Here strategies are about how to meet the competitions in a particular product
market and strategies have to be related to a unit within an organisation. The managers at
this level translate the general statements of direction and intent churned out at
Levels and Approaches to Strategic Decision Making 31
corporate level. They identify the most profitable market segment, where they can excel,
keeping in focus the vision of the company. The corporate values, managerial
capabilities, organisational responsibilities, and administrative systems that link strategic
and operational decision-making level at all the levels of hierarchy, encompassing all
business and functional lines of authority in a company are dealt with at this level of
strategy formulation. The managerial style, beliefs, values, ethics, and accepted forms of
behaviour must be congruent with the organisational culture and at this level, these
aspects are diligently taken care of by strategic managers.
Operational Level
Planning alone cannot create massive mobilisation of resources and people and can
never generate high quality of strategic thinking required in complex organisational
context. For this to happen, the planning should be carefully dovetailed and integrated
with significant administrative systems viz. management control, communication,
information management, motivation, rewards etc. It is also vital that all these systems
are supported by organisational structure that define various authority and responsibility
relationships, among various members of the company and specifically at operational
level. The culture of the organisation should be accounted for, and these systems should
find adaptability with the culture of the organisation.
Strategies at
Operational
Level
Strategies at Strategies at
Operational Operational
Level Level
Strategies at
Operational
Level
Strategies at Strategies at
Operational Operational
Level Level
The nature of decisions taken at corporate level give a vision to the organisation. The
decisions taken are visionary in nature and hence are highly subjective. The vision of a
company evolves after a lot of deliberations among the directors who decide that how
their company would be known after a long period of time, say after ten to fifteen years.
The decisions at this level are therefore vital for selecting the directions of growth of a
company. Since it is very difficult to foresee what would happen to a company after a
long period of time, the decision essentially should have built-in flexibility as these
would have far-reaching consequences on the operations of the company. The decisions
at this level also involve greater risks, costs, potential profits etc. The characteristic
strategies at this level may include the following in a typical organisation.
0 Business scope and an expression of competitive leadership.
1 Identification of product market segments.
2 Corporate strategic thrusts and planning challenges relevant to the business unit.
3 Internal security at the business level that includes identification and
evaluation of critical success factors and assessment of competitive position.
4 Environmental scan at business level and identification of product markets
and industry attractiveness.
5 Formulation of business strategy is a set of multi-year broad action programmes.
At the functional level, the decisions involve action-oriented operational issues.
Essentially these are short-term type and hence periodically made. They reflect
some or all part of the strategy at corporate level. These decisions are also
comparatively of low risk and involve lower costs as the resources to be used by
them are from the organisation itself. The company as a whole is rarely involved
in these decisions. They are more concrete, clear, simple to implement and do
not disturb the ongoing processes of the company. The decisions at this level are
more critically examined, in spite of being less profitable.
strategic planning on a commodity basis, and any new M.B.A. comes equipped
with at least one method for developing such plans.
Unfortunately, the tools for implementing strategies have not developed as
quickly as the tools we use for planning. The result of this discrepancy—failed
plans and abandoned planning efforts—is all too visible:
A major diversified manufacturer concluded that a steady stream of new
products was the most important factor in improving the stock price, yet the
performance measures and management reports imposed on the division heads
stress quarterly profit. As a result, division managers don’t make the long-term
investment required for successful new product development.
A leading consumer goods company committed itself to strategic planning and
built a staff of over 30 planners, many with M.B.A.s, and experience in
consulting firms. Unfortunately, the expected benefits of planning failed to
materialise; in less than two years, the department was disbanded and planning
responsibility returned to the operating units.
Recently, business writers have begun to pay more attention to the problems of strategy
implementation. Corporate culture is now widely acknowledged as an important force in
the success or failure of business ventures; studies of Japanese management practices
point out the effectiveness of participative methods in securing wholehearted
commitment to new strategies at all levels of the organisation.
Despite this interest, three critical questions remain unanswered:
0 How can executives be more effective in putting chosen strategies into action?
1 How can the planning process be managed so that the strategies which
emerge are realistic/ not only in terms of the market place, but also in
terms of the politics, culture, and competence of the organisation?
2 Research shows that managers do not analyse opportunities exhaustively
before taking action; rather, they shape strategy through a continuing
stream of individual decisions and actions. How can we reconcile the static
academic dogma, “First formulate strategy, then implement it,” with the
dynamic reality of managerial work?
To shed some light on these questions, we studied management practice at a
number of companies. We have found that their approaches to strategy
implementation can be categorised into one of five basic descriptions. In each
one, the chief executive officer plays a somewhat different role and uses
distinctive methods for developing and implementing strategies. The approaches
differ in a number of other dimensions as well (see Exhibit 2.6). We have given
each description a title to distinguish its main characteristics.
The first two descriptions represent traditional approaches to implementation.
Here the CEO formulates strategy first, and then thinks about implementation later.
0 The commander approach—The CEO concentrates on formulating the strategy,
applying rigorous logic and analysis. He either develops the strategy himself or
supervises a team of planners. Once he’s satisfied that he has the “best” strategy, he
passes it along to those who are instructed to “make it happen.”
34 Strategic Management
F
H
o
organisation. It seeks to implement strategy through the development of a
corporate culture throughout the organisation.
The final approach begins to answer some of the questions posed above by H
p
taking advantage of managers’ natural inclination to develop opportunities a
R
as they are encountered. While it has not been widely recognised or studied
up to now, we think it may represent the next major advancement in the art
of strategic management.
R
1 The crescive approach—In this approach, the CEO addresses strategy planning
and implementation simultaneously. He is not interested in strategising alone, or even
in leading others through a protracted planning processs. Rather, he tries, through his
statements and actions, to guide his managers into coming forward as
Levels and Approaches to Strategic Decision Making 35
prescribes. In fact, the timing of when to implement a decision based on the analysis
may require an intuitive feel for what the data are telling you. In many cases,
judgment such as this might be preferable to relying on the analysis. Recognize,
then, that analytical models are tools to help the decision maker refine judgment.
Those opposed to this approach argue that
0 It does not effectively use all the tools available to modern decision makers.
1 The rational approach ensures that adequate attention is given to
consequences of decisions before big mistakes are made.
Analytical- Political-
rational behavioral
Intuitive-
emotional
processes seem to be more relational and holistic than ordered and sequential,
and more intuitive than intellectual....”
For these reasons, no theoretical model, however painstakingly formulated, can
adequately represent the different dimensions of the process of strategic decision-
making. Despite these limitations, we can still attempt to understand strategic decision-
making by considering some important issues related to it. Six such issues are:
0 Criteria for decision-making. The process of decision-making requires
objective-setting. These objectives serve as yardsticks to measure the
efficiency and effectiveness of the decision-making process. In this way,
objectives serve as the criteria for decision-making. There are three major
viewpoints regarding setting criteria for decision-making.
0 The first is the concept of maximisation. It is based on the thinking of
economists who consider objectives as those attributes which are set
at the highest point. The behaviour of the firm is oriented towards
achieving these objectives and, in the process, maximising its returns.
1 The second view is based on the concept of satisficing. This
envisages setting objectives in such a manner that the firm can
achieve them realistically through a process of optimisation.
2 The third viewpoint is that of the concept of incrementalism. According to
this view, the behaviour of a firm is complex and the process of decision-
making, which includes objective-setting, is essentially a continually-
evolving political consensus-building. Through such an approach, the firm
moves towards its objectives in small, logical and incremental steps.
1 Rationality in decision-making. In the context of strategic decision-making,
rationality means exercising a choice from among various alternative courses
of action in such a way that it may lead to the achievement of the objectives in
the best possible manner. Those economists who support the maximizing
criterion consider a decision to be rational if it leads to profit maximisation.
Behaviourists, who are proponents of the satisfying concept, believe that ratio-
nality takes into account the constraints under which a decision-maker oper-
ates. Incrementalists are of the opinion that the achievement of objectives
depends on the bargaining process between different interested coalition
groups existing in an organisation, and therefore a rational decision-making
process should take all these interests into consideration.
2 Creativity in decision-making. To be creative, a decision must be original and
different. A creative strategic decision-making process may considerably affect the
search for alternatives where novel and untried means may be looked for and
adopted to achieve objectives in an exceptional manner. Creativity as a trait is
normally associated with individuals and is sought to be developed through
techniques such as brainstorming. One of the attitudinal objectives of a business
policy course it to develop the ability to go beyond and think, which, in other
words, is using creativity in strategic decision-making.
3 Variability in decision-making. It is a common observation that given an identical set
of conditions two decision-makers may reach totally different conclusions.
Levels and Approaches to Strategic Decision Making 39
This often happens during case discussions too. A case may be analysed
differently by individuals in a group of learners, and, depending on the
differing perceptions of the problem and its solutions, they may arrive at
different conclusions. This happens due to variability in decision-making.
It also suggests that every situation is unique and there are no set formulas
that can be applied in strategic decision-making.
0 Person-related factors in decision-making. There are a host of person-related
factors that play a role in decision-making. Some of these are age, education,
intelligence, personal values, cognitive styles, risk-taking ability, and creativity.
Attributes like age, knowledge, intelligence, risk-taking ability, and creativity are
generally supposed to play a positive role in strategic decision-making. A
cognitive style which enables a person to assimilate a lot of information,
interrelate complex variables, and develop an integrated view of the situation is
specially helpful in strategic decision-making. Values, as enduring prescriptive
beliefs, are culture-specific and important in matters of social responsibility and
business ethics— issues that are important to strategic management.
1 Individual versus group decision-making. Owing to person-related factors,
there are individual differences among decision-makers. These differences
matter in strategic decision-making. An organisation, as it possesses special
characteristics, operates in a unique environment. Decision-makers who un-
derstand an organisation’ s characteristics and its environment are in
advantage position to undertake strategic decision-making. Individuals such
as chief executives or entrepreneurs play the most important role as strategic
decision-makers. But as organisations become bigger and more complex, and
face an increasingly turbulent environment, individuals come together in
groups for the purpose of strategic decision-making.
Chapter 3
Process of Strategic Management
“Business policy” is a term traditionally associated with the course in business schools
devoted to integrating the educational program of these schools and under-standing what
today is called strategic management. In most businesses in earlier times (and in many
smaller firms today), the focus of the manager’s job was on today’s decisions for today’s
world in today’s business. That may have been satisfactory then instead of focusing all
their time on today, managers began to see the value of trying to anticipate the future and
to prepare for it. They did this in several ways.
0 They prepared systems and procedures manuals for decisions that must be
made repeatedly. This allowed time for more important decisions and
ensured more or less consistent decisions.
1 They prepared budgets. They tried to anticipate future sales and flows of
funds. In sum, they created a planning and control system.
Budgeting and control systems helped, but they tended to be based on the status quo
— the present business and conditions—and did not by themselves deal well with
change. These systems did provide better financial controls and are still in use. Later
variations included capital budgeting and management-by-objectives systems.
Because of the lack of emphasis on the future in budgeting, long-range planning
appeared. This movement focused on forecasting the future by using economic and
technological tools. Long-range planning tended to be performed primarily by corporate
staff groups, whose reports were forwarded to top management. Sometimes their reports
and advice were heeded (when they were understood and were credible); otherwise, they
were ignored. Since the corporate planners were not the decision makers, long-range
planning had some impact, but not as much as would be expected if top management
were involved. Then, too, they were producing first-generation plans.
“First-generation planning” means that the firm chooses the most probable
appraisal and diagnosis of the future environment and of its own strengths and
weak -nesses. From this, it evolves the best strategy for a match of the
environment and the firm—a single plan for the most likely future.
Today’s approach is called “strategic planning” or, more frequently, “strategic
management.” The board of directors and corporate planners have parts to play
in strategic management. But the starring roles are for the general managers of
the corporation and its major operating divisions. Strategic management focuses
on “second-generation planning,” that is, analysis of the business and the
preparation of several scenarios for the future. Contingency strategies are then
prepared for each of these likely future scenarios.
Strategy formulation is the process of establishing a business mission, conducting research to
determine critical external and internal factors, establishing long-term objectives, and
choosing among alternative strategies. Sometimes the strategy formula stage of strategic
Process of Strategic Management 43
STAGES ACTIVITIES
Strategy Conduct Integrate Make
Strategy Implementation
Strategy implementation is often called the action stage of strategic management.
Implementing means mobilising employees and managers to put formulated
strategies into action. Three basic strategy-implementation activities are establishing
annual objectives, devising policies, and allocating resources. Often considered to be
the most difficult stage in strategic management, strategy implementation requires
personal discipline, commitment, and sacrifice. Successful strategy implementation
hinges upon managers’ ability to motivate employees, which is more an art than a
science. Strategies formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful strategy
implementation. Strategy implementation includes developing strategy—supportive
budgets, programs, and cultures, and linking motivation and reward systems to both
long-term and annual objectives. Strategy-implementation activities affect all
employees and managers in an organisation. Every division and department must
decide on answers to questions such as “What must we do to implement our part of
the organization’s strategy?” and “How best can we get the job done?” The
challenge of implementation is to stimulate managers and employees throughout an
organisation to work with pride and enthusiasm toward achieving stated objectives.
Strategy Evaluation
The final stage in strategic management is strategy evaluation. All strategies are
subject to future modification because external and internal factors are constantly
changing. Three fundamental strategy-evaluation activities are (I) reviewing external
and internal factors that are the bases for current strategies, (2) measuring
performance, and (3) taking corrective actions. Strategy evaluation is needed
because success today is no guarantee of success tomorrow! Success always creates
new and different problems; complacent organisations experience demise.
Strategy formulation, implementation, and evaluation activities occur at three
hierarchical levels in a large diversified organisation: corporate, divisional or
strategic business unit, and functional. By fostering communication and
interaction among managers and employees across hierarchical levels, strategic
management helps a firm function as a competitive team. Most small businesses
and some large businesses do not have divisions or strategic business units, so
these organisations have only two hierarchical levels.
The strategic-management process can best be studied and applied using a
model. Every model represents some kind of process. The framework illustrated
below is a widely accepted, comprehensive model of the strategic-management
process. This model does not guarantee success, but it does represent a clear and
practical approach for formulating, implementing, and evaluating strategies.
Relationships among major components of the strategic-management process are
shown in the model. (Exhibit 3.2)
Process of Strategic Management 45
" #
'( ! )* $ ( + ! * ! +$ $ ( + , *) $ ( +
Toward Toward
more less
formality Feormaalityity
and y and
more Fewer
details details
Organisation
Small one-plant compaines
Large compaines
Management styles
Policy maker
Democratic-permissive
Authoratic
Day-to-day operational thinker
Intuitive thinker
Experienced in planning
Inexperienced in planning
Complexity of environment
Stable environment
Turbulent environment
Little competition
Many markets and customers
Single market and customer
Competition severe
Complexity of production processes
Long production lead times
Short production lead times
Capital intensive
Labor intensive
Integrated manufacturing processes
Simple manufacturing processes
High technology
Low technology
Market reaction time for new
Production is short
Market reaction time is long
Nature of problems
Facing new complex, tough problems
having long-range aspects
Facing tough short-range problems
Purpose of planning system
Coordinate division activities
Train managers
Chapter 4
Roles of Strategists, Mission and
Objectives
Strategists are individuals or groups who are primarily involved in the formulation
implementation, and evaluation of strategy. In a limited sense, all managers are
strategists. There are persons outside the organisation who are also involved in
various aspects of strategic management. They too are referred to as strategists.
The top management function is usually performed by the Chief Executive Officer
(CEO) of the organisation, by whatever name called, in coordination with the Chief
Operating Officer (COO) or President, Vice-Presidents, and divisional and
departmental heads. The top managers are also known as general manager.
Top management especially the CEO is responsible to the board of directors for
overall management of the organisation. The job of the top management is multi-
dimensional and oriented towards the welfare of the total organisation. Though
the specific top management functions may vary from organisation to
organisation, one could have a good idea about it from an analysis of an
organisation’s mission, objectives, strategies and key activities.
The Chief Executive in most of the companies is called the Managing Director
(Chairman-cum-Managing Director) or President. Where the executive head of
the organisation is the Managing Director or Chairman- cum-Managing Director,
the President is usually in the position of the Chief Operating Officer (COO).
The Executive leader, of a major segment of the organisation such as a division,
department or unit is typically called a general manager.
The Chief Executive Officer (CEO) is a strategist, organisational builder and leader. The
CEO is the principal strategist of his organisation. Although the BODs and other
members of the top management play an important role, the CEO cannot really delegate
all his strategic responsibilities to anyone else. He is in fact a strategic thinker. He is the
person who links the internal world of the corporation with the external world. This role
can be described as the “gate keeping” role of the CEO; it is both “flag flying” and
“transmitting” to and receiving signals from the external environment. It is he who has
both the corporate understanding and the vantage joint perspective which is required to
translate the signals from the outside world. These signals may often be subtle, and not
very perceptible. He has to sow seeds for new thoughts within the organisation and has
to nurture and sustain those which come from outside.
Many CEOs are so involved in the day- to-day operations that they hardly have any time
left for strategic matters, it has been rightly said that routine drives out creativity. The
CEO has to see to it that he is left with sufficient time for strategic responsibilities. An
American Survey indicated that the executives who reached to the top allocated the
largest part of their time to long range planning and policy setting. They even wished
that they had more time for long range planning and human resource management.
48 Strategic Management
While operating within the environment and the resources at hand, the CEO has to
build the organisation. Organisation building is a continuous process involving
organisational change. Some of organisational building responsibility can certainly
be delegated but the CEO, being at the helm of the affairs, has to remain the initiator
for experimenting with new ideas, approaches and systems. He is the key person in
the organisation. The organisational changes should be made gradually and
regularly, and not suddenly or sporadically. It is a human tendency to resist change
for a variety of reasons, the main being uncertainty. It is therefore important to
recognise resistance to change prior to attempting to make organisational changes.
The common reasons for people resisting change are: vested interests, differing
perceptions, misunderstanding and lack of trust, and low tolerance for change.
Some useful ways to deal with resistance are: education and communication,
participation and involvement, and facilitation and support. All these ultimately
lead to the creation of a climate of better confidence.
The CEO is the first among leaders of his organisation. He must have the will to manage.
“To manage well a person has to want to manage; he has to really love it”. How a Chief
Executive can turn around a company is amply revealed in a case history. An expatriate
was called to India to boost the performance of an Indian subsidiary in the processing-
marketing, industry. The company had tremendous goodwill in the market but its
performance was wholly out of alignment with its image. In spite of good products, the
company was not able to do well because of traditional management which was
characterised by lethargy and lack of articulation. The new CEO, who was gentle in his
speech, sensitive to human relations and had charming social manners, was often
perceived by company executives as an academic who had somehow strayed into the
world of business. However, soon after joining his new position, the new CEO started
questioning the current assumptions relating to product strategies, marketing and
distribution. He started the system of target setting and performance appraisal.
It soon became clear that the velvet glove concealed an iron fist. He left nobody in doubt
about his conviction that if the company had to move forward it had to be sensitive to the
environment and regulatory policies, and pull itself up by the organisational boot straps.
He redefined product-market posture and reconstituted product groups into divisions
with profit responsibility, after taking into consideration the technological, marketing
and managerial dimensions which have an impact on performance. He selected the heads
of the new divisions carefully. Planning systems were st:eamlined, targets regarding
sales, cost, profit, product development etc. were developed on the basis of open
discussion and information sharing. Considerable autonomy was devolved upon the
divisional heads with regard to staffing, resource allocation, and marketing strategies.
Many eyebrows were raised about his style of tough-minded behaviour, quite unknown
in the history of the organisation. Within a period of less than two years the organisation
turned the corner and was found attempting for market leadership in the industry.
Mentoring and helping others along the road to success is an important activity
of managers and more so of CEO. The higher a manager gets in an organisation,
the more responsibility he has for such helping activities. It is a characteristic of
a really genuine leader at any level to lift others up, even beyond his own level at
every legitimate opportunity.
Roles of Strategists, Mission and Objectives 49
Direction
Top management, undoubtedly, is expected to give direction to the organisation.
Should the organisation continue to produce goods and services provided hitherto?
Should there be a change in products supplied? What are the areas, from which the
organisation should withdraw? What are the new areas into which it should enter?
In a reasonably stable environment these questions are not that relevant. But in a
changing environment there is a need to keep a close watch. Some products/
businesses which were doing well in recent years may not continue to do so.
What should the organisation do? Disinvest, but what are the new areas into
which it could go? Most big industrial houses have gradually withdrawn from
textiles or are in the process of doing so. These include Birlas, Tatas, Shri Ram
Group, Modis. They have entered into new areas such as chemicals,
automobiles, tyres, electronics, reprographics. Who decided about these? Of
course the top management or more specifically top management team.
Vision Setting
Having given the direction to the organisation, top management team is expected
to set standards for the short run and the long run. What is to be achieved, say 5
to 10 years from now? What are the targets for the given years?
Can you guess which task is more important—setting standards for the short run or
the long run? Of course, both are equally important and are interconnected. An over-
emphasis on the achievement in the short run may mean that the organisation is not
able to initiate action in time for moving into more promising areas in the long run.
Similarly, an overly concern for achievements in the long run may put the
organisation, in difficulty for meeting the short term requirements of cash and other
facilities. Evolving a balanced perspective of the short term and long term interests
has been emphasised in the literature. It is argued that the top management needs to
have bifocal glasses which help it in managing the short term as well as long term
interests of the organisation simultaneously.
50 Strategic Management
Standard Setting
Top management not only sets standards but evaluates the performance of various units
or groups of businesses. Setting standards has no meaning without some system of
control. Developing a system of control is one of the tasks of top management. The
frequency of such exercise on evaluation differs from situation to situation. However,
the evaluation should provide scope for initiating corrective action.
One of the formal ways of having a system of evaluation is provided by Management by
Objectives. In this approach an attempt is made to arrive at an agreement on what is to
be achieved. These targets, then constitute the basis on which evaluation is attempted.
The dimension relating to the managerially derived expectations of the Board of
Director’s role seems to be of relatively recent origin. In the last two decades or so,
industrial development has been marked by far-reaching technological changes, leading
to equally fundamental competitive reorientation at the global level. As a result, many
erstwhile great names in industry have been humbled. With such rapidly mounting
changes and uncertainties, the role of BODs has begun to be viewed from much wider
and long-term perspective—beyond the minimum requirements of law. Probably, upto
the 1970’s, the duty of BODs to ‘superintend, control and direct’ had gone by default.
Stable environment had helped this key role to remain dormant. What arc then the
renewed ramifications of this role at present? These are meant to ensure that:
0 the enterprise continues to remain effective on the standpoint of
technology parameters.
1 the enterprise continues to achieve healthy market growth in competitive
conditions,
2 divestment and diversification take place on sound lines.
3 long-term productivity and quality are never sacrificed at the altar of short-
term profitability.
4 judicious earnings retention policy is adopted for financing growth,
modernisation etc.
5 serious and sustained attention is devoted towards building a sound system
of human values and exalted corporate culture.
It is a common observation that BODs function rather passively. Often the members are
selected not because of their knowledge of the specific functioning of the company
which they are supposed to oversee but because of their compatibility, prestige or esteem
in the community. Traditionally, as it happens, the board members arc expected (or
requested) to approve the proposals put forward to them by top management. Usually,
the Chief Executive Officer (CEO) or the group of promoters have a free reign in
choosing the directors and in having them elected by the shareholders. The CEO or the
promoter group may select board members who in their opinion, will not disturb the
company’s policies and functioning . The directors so selected often feel that they should
go along with any proposals made by the CEO and his group. Thus, a strange or
somewhat paradoxical situation arises. The board members find themselves accountable
to the very management they are expected to oversee.
Roles of Strategists, Mission and Objectives 51
Even today, the boards in India, especially in family owned or closely held
companies, are mere figureheads. Over the recent past, however, lending
institutions, financial media and corporate analysts have seriously questioned the
role of BODs. The investors and government in general arc now better aware of
the role of BODs. In general, it is felt that there is a critical lack of responsibility
on the part of BODs. Though the Companies Act throws some light on the
powers of BODs and the restrictions placed on those powers, it does not specify
to whom they are responsible and what for. However, there is a broad agreement
that BODs appointed or elected by the shareholders are expected to:
0 oversee the management of the company’s assets
1 establish or approve the company’s mission, objectives, strategy and policies
2 review management actions and financial performance of the company
3 hire and fire the principal executive and operating officers of the company.
An important issue in this context is : should BODs merely ‘direct’ or may they
‘manage’ also? Many experts and practicing top managers say that BODs should
only oversee and direct, and never get involved with detailed management.
There are others who feel that, for direction to be realistic and sensible, some in-
depth involvement with details is necessary. The majority view, however, is in
favour of directors directing the affairs of the company and not managing them.
Probably, in the majority of cases in India, the real problem is one of non-
involvement of board members—almost to the extent of callousness—in enterprise
affairs. Especially in those enterprises which are sick, or are near to this state, it
should be clearly decided whether their BODs will merely ‘direct’ and feel satisfied,
for such enterprises often lack competent managers at all levels. So, whom would
BODs direct? Is there a need, therefore, for the BODs here to spend more time and
‘manage’ such enterprises too— for a stipulated period of time?
The board is expected to act with “due care”. That is they “must act with that degree
of diligence, care, and skill which ordinarily prudent men would exercise under
similar circumstances in like positions.” If a director or the Board as a whole fails to
act with due care and, as a result,, the company in some way is, harmed, the careless
director or directors may be held personally liable for the harm done.
Further, they may be held personally responsible not only for their own actions
but also for the actions of the company as a whole.
In addition, directors must make certain that the company is managed in
accordance with the laws and regulations of the land. They must also be aware
of the needs and demands of the constituent groups so that they can bring about
a judicious balance between the interests of these diverse groups, while ensuring
at the same time that the company continues to function.
According to Bacon and Brown, a BODs, in terms of strategic management, has
three basic tasks.
0 To initiate and determine: A board can delineate an organisation’s
mission and specify strategic options to its management.
52 Strategic Management
The “directing” function of the board has internal and external components. Internal
component relates to various actions taken by the executives and their implications for
the organisation, including R&D, capital budgeting, new projects, new competitive
thrusts, relationships with financial institutions and banks, foreign collaborators, major
customers and suppliers. External component -relates to identifying broad emerging
opportunities and threats in the environment and feeding them to the management so
that “strategic mismatches” do not occur. The hoard should see that the organisation
always remains in alignment with the social, economic and political milieu.
It is quite likely that many Chief Executive Officers (CEOs) and some board members
may not want the board to be involved in strategic mailers at more than a superficial
level. The reasons are not far to seek. Many companies may not have an explicit or well
articulated strategy. The management of such companies take strategic decisions
intuitively rather than through a rigorous process of search and analysis. Further, the
managements of some companies do not like outside directors to know enough about the
new strategic decisions or postures. They may perceive the involvement of board
members in strategic decision making as a threat to their power.
Role of Entrepreneurs
According to Drucker, “the entrepreneur always searches for change, responds to it and
exploits it as an opportunity”. The entrepreneur has been usually considered as the person
who starts a new business, is a venture capitalist, has a high level of achievement-
motivation, and is naturally endowed with the qualities of enthusiasm, idealism, sense of
purpose, and independence of thought and action. However, not all of these qualities are
present in all entrepreneurs nor are these found uniformly. An entrepreneur may also
demonstrate these qualities in different measures at different stages of life. Contrary to the
generally accepted view of entrepreneurship, entrepreneurs are not to be found only in small
businesses or new ventures. They are also present in established and large businesses, in
service institutions, and also in the bureaucracy and government.
By their very nature, entrepreneurs play a proactive role in strategic
management. As initiators, they provide a sense of direction to the organisation,
and set objectives and formulate strategies to achieve them. They are major
implementers and evaluators of strategies. The strategic management process
adopted by entrepreneurs is generally not based on a formal system, and usually
they play all strategic roles simultaneously. Strategic decision-making is quick
and the entrepreneurs generate a sense of purpose among their subordinates.
considerable authority within the SBU while maintaining co-ordination with the
other SBUs in the organisation.
With regard to strategic management, SBU-level strategy formulation and
implementation are the primary responsibilities of the SBU-level executives. Many
public and private sector companies have adopted the SBU concept in some form or the
other. “There are several family-managed groups today who boast of their profess-
fsionally-managed organisation structure. Each of their companies has a chief executive
who... has total responsibility.. and authority over the profit center. There are even
separate management boards to review the performance of each profit center”. At
Shriram Fibres, the strategic planning system covered the different businesses ranging
from nylon yarn manufacture to the provision of financial services. Strategic plans were
formulated at the level of each SBU as well as at the corporate level. The corporate
planning department at the bead office coordinated the strategic planning exercise at the
SBU level. Each SBU had its own strategic planning cell.
Role of Consultants
Many organisations which do not have a corporate planning department owing to
reasons like small size, infrequent requirements, financial constraints, and so on, take the
help of external consultants in strategic management. These consultants may be
individuals, academicians or consultancy companies specialising in strategic
management activities. According to the Management Consultants Association of India,
management consultancy is “a professional service performed by specially trained and
experienced persons to advise and assist managers and administrators to improve their
performance and effectiveness and that of their organisations”. Among the many
functions that management consultants perform, corporate strategy and planning is one
of the important services rendered. The main advantages of hiring consultants are:
getting an unbiased and objective opinion from a knowledgeable outsider, cost
-effectiveness, and the availability of specialists’ skills. According to a senior consultant
of a large consultancy firm, the trend is that “family-owned companies and the public
sector are relying more heavily on consultancy services than the multinationals”. There
are many consultancy organisations, large and small, that offer consultancy services in
the area of strategic management in India. Instances of companies seeking the help of
consultants in various strategic exercises such as diversification, restructuring, and so
on, are legion.
It should be noted that consultants do not perform strategic management, they
only assist the organisations and their managers in strategic management by
working of specific time-bound consultancy assignments.
not responsible for strategic management and usually does not initiate the process
on its own. By providing administrative support, it fulfills its functions of assisting
the introduction, working, and maintenance of the strategic management system
progress. NASA’s mission in the 1960s was to begin space exploration and land
a man on the moon. Without establishing specific goals to get to along the way,
we might be still waiting for that first “small step.” So firms also must express
their mission and philosophy by establishing statements about the grand design,
quality orientation, atmosphere of the enterprise, and the firm’s role in society.
After Roger Smith took over as chairman of General Motors, he moved quickly
to solve some problems at GM and altered its strategy. As part of the process, he
distributed “culture cards” to be carried in the pockets of executives to remind
them of their new mission. The card reads
The fundamental purpose of General Motors is to provide products and services
of such quality that our customers will receive superior value, our employees
and business partners will share in our success, and our stockholders will receive
a sustained, superior return on their investment.
Other firms consciously (or subconsciously) develop “core principles,” or norms, which
guide decision making or behavior. These principles serve as mechanisms for self-
control to guide managers at all levels of the organisation. Hence, if quick decisions are
needed at lower levels of an organisation, such core principles serve as guides to making
decisions or taking action consistent with the overriding mission and strategy of the
business. These are different from policies in that they are frequently part of the culture,
or ways of doing things, that emerge in the informal organisation.
In practical, everyday decision making, most organisations are not immediately
concerned with questions of continued existence. Survival for most is relatively assured
within the time frame of thinking of those in charge. And the mission tends to become
an ideological position statement which is only occasionally referred to in support of
legitimisation. So what tends to occupy the minds of the molders of organisation
purpose are various objectives to improve performance. However, prescriptively, a
mission statement and core principles ought to serve as guidelines for strategic decisions
rather than as a set of platitudes. Otherwise, short-term thinking can get in the way of
the long-term best interests of the organisation in society.
Business
Part of the mission statement is the definition of the business itself. By this we mean a
description of the products, activities, or functions and markets that the firm presently
pursues. Products (or services) are the outputs of value created by the system to be sold to
customers. Markets can refer to classes or types of customers or geographic regions where
the product and/or service is sold. When we refer to functions, we mean the technologies or
processes used to create and add value. For example, in agriculture one might plant and grow
seeds, harvest crops, mill grain, process grain into various food products, and distribute or
retail the finished product. Each stage adds value and represents a separate function. Some
firms do all the functions while others do a limited number or only one. Consider a full-
service airline versus a no-frills carrier. One operates full-service ticket counters in airports
and downtown locations; the other may ticket on the plane, offer no interline ticketing, offer
few fare options, and so on. The no-frills airline may use first come-first-serve seating versus
ticketing at gates. On board, the no-frills carrier may not serve food or drink or charge extra
for the service. The full-
58 Strategic Management
line carrier may provide free baggage checking while the no-frill firm charges or
provides no interline baggage connection. Each of these options represents a service
or function configuration. Functions of ticketing, gate operations, on-board service,
and baggage handling can provide options for adding value to services provided.
A good business definition will include a statement of products, markets, and functions.
For example, a business definition for Apple might state the following: We design,
develop, produce, market, and service microprocessor-based personal
computers in United States and foreign countries. In contrast, Tandy might be
defined as a U.S. manufacturer and retailer of consumer electronic equipment.
Note that Tandy performs fewer functions than Apple and is a bit more restricted
geographically, but it has a wider product definition. Westinghouse manufactures,
sells, and services equipment and components which generate, transmit,
distribute, utilize, and control electricity. Note that this definition includes a very
broad line: it specifies a locus around which the products are related but ignores market
issues (except for the notion that its markets involve electricity). In its 1985 Annual
Report, Schulumberger asks, What are our businesses? The answer:
First, we are an oilfield services company, bringing technology to the oil industry
anywhere, anytime. [We are] also an electronics company. We are ready to expand in the
international markets through leadership in electricity, . . electronic payments, . . .
instruments, bringing technology to the utilities, to the aerospace industry, to the
banking community . . .
A good statement of the business definition of the firm should meet certain
criteria: it should be as precise as possible and indicate major components of
strategy (products, markets, and functions). Some go a bit further than this by
also indicating how the mission is to be accomplished.
Defining the mission and business definition is the starting point of strategy analysis. It
answers the question, What business are we in? When performing the initial gap analysis
we find that such a statement indicates where the firm’s current strategy has been going
up to this point is time and what results might be expected if it continues. From there,
once objectives have been specified and other analyses have been performed,
determinations can be made about whether such a definition can continue successfully,
or must be altered to close gaps. In other words, the strategic management process starts
with the current business definition but proceeds with other questions: What business
should we be in? Who are our customers? How do we serve them? That is, some
conditions might call for a strategic change in products, markets, or functions, or
changes in the way in which that business definition is going to be accomplished
(competitive strategy and policies). For example, long after cars, interstate highways,
and airplanes sent many railroad companies into bankruptcy court, some railroad
companies are reemerging with new corporate identities. The Reading Company, a
major regional railroad established in 1833, now owns only 16 miles of track. Like many
former railroad firms, Reading is now a major real estate operator (even though the
Monopoly game board earns it immortality as a railroad).
A problem many firms find themselves with is that through acquiring a series of
businesses unrelated to their mission or business definition, they become conglomerates,
with little to tie them together other than financial objectives. Many firms have found a
need to return to basic business definitions because they cannot effectively manage the
Roles of Strategists, Mission and Objectives 59
diversity. It took General Mills longer than most, but after 17 years of trying
they finally sold off their toy division and nonfood lines to “get back to the
kitchen,” which they knew best about.
Changing the business definition is one of the basic strategy alternatives. But
before strategy determination is made, the other major aspect of strategic gap
analysis is a determination of whether desired objectives will be attained.
Analysts must determine if continuation with the mission and adherence to the
business definition will lead to expected outcomes close to those desired.
0 Finally, objectives are not strategies. Strategies are means to an end. Note
that expansion was not among the objectives listed. Expansion is one type of
strategy but not an end in itself. In itself, expansion of sales or assets may not
improve performance. But cutting back (retrenchment) in certain areas of the
operation could also be a way to increase efficiency and improve
performance. So expansion and retrenchment are ways in which goals can be
achieved, and both can lead to performance increases (e.g., growth in returns).
Not all managers agree with this distinction, but we believe it is an important
one. (This is a problem with strategic management terminology in general.)
One other issue regarding objectives which has become important to strategists is the
priority attached to objectives relating to social responsibility. Social responsibility is an
ill-defined term, but the basic idea is that the economic functions provided by business
ought to be performed in such a way that other social functions are, at worst, unharmed
and, at best, promoted. Thus businesses are urged to be as concerned with human rights,
environmental protection, equality of opportunity, and the like, as they are with
providing outcomes such as economic efficiency.
Several dilemmas arise. A major problem is how to define socially responsive behavior.
Value systems are so diverse that achieving consensus on this issue is difficult. Equally
problematic is the fact that economic organisations automatically take resources from
organisations in other sectors and often detract from performing other societal functions.
Businesses weren’t designed to promote public health, safety and welfare (though some
use charitable giving as a marketing ploy). A common example is detrimental health
effects from pollution created by the production of goods. Do we stop producing goods?
Do we increase costs to the extent that other societal goals are adversely affected? For
instance, a completely safe automobile might be so expensive that possible cost
increases to protect human safety become detrimental to economic well-being. Cost-
benefit trade-offs are extremely difficult to make.
In some cases, external threats can be so severe as to call into question the legitimacy of
the mission of the organisation, as in the case of utilities which generate power with
nuclear plants. Policies to deal with these concerns include ignoring the issue, using
public relations campaigns to try to mitigate unfavorable publicity, and altering goal
priorities and changing strategies. Some creative strategists try to turn these kinds of
threats into opportunities. For instance, some coal companies have increased the value
of land originally used for strip-mining by converting the strip mines into recreation
complexes. But these options are not always available. In any case, decision makers are
being urged to increase the priority given to these concerns by some.
On the other hand, businesses are also criticised if they stray too far from their
economic function. For instance, business firms are chastised for creating
political action committees as a means to influence their environment.
While research evidence is mixed, the predominant view is that social responsibility
bears little (positive or negative) relationship to financial performance objectives
Clearly, then, establishing goal priorities and resource allocation requires a
consideration of issues beyond simple economic efficiencies.
Objectives
Why do firms have objectives, and why are they important to strategic management?
There are four reasons.
62 Strategic Management
0 The external coalition includes owners, suppliers, unions, and the public. These
groups influence the firm through social norms, specific constraints, pressure
campaigns, direct controls, and membership on the board of directors. Mintzberg
specifies three types of external coalitions, noted in Exhibit 4.3.
1 The internal coalition includes top management, middle-line managers,
operators, analysts, and support staff. These groups influence the firm
through the personnel control system, the bureaucratic control system, the
political system, and the system of ideology. Mintzberg specifies 5 types
of internal coalitions, shown in Exhibit 4.3.
Mintzberg says that there are six basic power configurations, as shown in Exhibit 4.3 In the
instrument power configuration, one external influence with clear objectives, typically the
owner, is able to strongly influence objectives through the top manager. In a closed-system
power configuration, power to set objectives rests with the top manager, who sets the
objectives. This is also true in the autocracy power configuration. In the missionary power
configuration, objectives are strongly influenced by past ideology and a charismatic leader.
Ideology tends to dictate the objectives. In the meritocracy power configuration, the
objectives are set by a consensus of the members, most of whom are professionals.
Thus the formulation of mission and objectives can be a simple process: the top
manager sets them subject to the environment. Or, more frequently, they are set
by a complex interplay of past and present, internal and external role players.
The third factor affecting the formulation of mission and objectives is the value system
of the top executives. Enterprises with strong value systems or ideologies will attract
0 Very combatandretainv managersVerywhosepaivvalues are similar. These values are essentially set of
1 Very innovattitudesv about what isNgoodinnvativeorbud, desirable or undesirable. These in turn will influence
2 Risk-orithen perceptiond of theRiadvantagesk-ri and disadvantages of strategic action an the choice of
3 Qualityobjectives. Exhibit 4Quan.4listsy the extremes of six selected values. Let’s look at each of
4 Autocratheseic to see how theyParmightcpaivaffect objectives.
6 Personal goals Shareholder goals
The following list corresponds to the continuum in Exhibit 4.4. Each dimension
is explained below:
0 Some executives believe that to be successful a firm must attack in the
market-place. Others believe that you “go along to get along.”
1 Some executives believe that to succeed a firm must innovate. Others
prefer to “let others make the mistakes first.”
2 Some executives know that to “win big, you must take big risks.” Others
comment, “Risk runs both ways.”
66 Strategic Management
time, only a few specific goals can be graspe and comprehended by any single
executive. Thus there appears to be a need for son grander vision as expressed
by a mission definition.
Note: Each of these factors represents a set of constraints on the establishment of the priorities
among future objectives. The set of mission and objectives considered at any one time is also limited.
Exhibit 4.5: Factors Influencing the Formulation of Objectives and Mission
equipment to the oil industry discovered this in 1974 and again in 1982
and 1986. Faced with an uncertain future, their objectives have begun to
focus on flexibility. When the cure for polio was found, the mission of the
National Foundation for Infantile Paralysis changed. So the attainment of
objectives can also lead to a crisis or new opportunities can create an
identity crisis if a firm seeks to take advantage of them.
0 Demands from coalition groups that make up the enterprise can change.
This often occurs as the membership or leadership of groups changes or as
internal power groups change. For instance, new government or labor
leaders or new competitors can alter the way a business sets its goal-
priorities. Similarly, if the comptroller becomes more powerful internally,
the firm might begin to stress shorter-term financial goals.
1 Normal life-cycle changes may occur which alter goal orientations. Though
the analogy with humans can be taken too far, there may be changes in
objectives or strategies which “naturally” occur in the aging process. Of
course, organisations may have more control over the sequencing and timing
of these stages than humans. Yet it is often difficult for an organisation to
know what stage it is in. And we’re not sure what might precipitate
organisational aging or movement. We do know that commitment to the past
may hinder change, and new agents in coalition groups are likely to hasten it.
These four classes of factors—aspirations, crisis, demands, and development —
can be used to predict the likelihood that mission and objectives will remain similar to those
of the past or be subject to redefinition. Thus in considering how mission and objectives are
formulated, we must examine various pressures for stability or change before a gap analysis
can be effectively done.
Strategic Business Unit 69
Chapter 5
Strategic Business Unit
A strategic business unit (SBU) is an operating division of firm
which serves a distinct product-market segment or a well-
defined set of customers or a geographic area. The SBU is
given the authority to make its own strategic decisions within
corporate guidelines as long as it meets corporate objectives.
Generally, SBUs are involved in a single line of business. A complementary cept
to the SBU, valid for the external environment of a company, is a strategic
business area (SBA). It is defined as “a distinctive segment of the environment in
which the firm does (or may want to do) business”.
A number of SBUs, relevant for different SBAs form a cluster of units under a corporate
umbrella. Each one of the SBUs has its own functional departments, or a few major
functional departments, while common functions arc grouped under the corporate level.
These different levels are illustrated in Exhibit 5.1. Two types of levels are depicted in
this exhibit. One relates to the organisational levels and the other to the strategic levels.
The organisational levels are those of the corporate. SBU and functions! levels. The
strategic levels are those of the corporate. SBU and functional level strategies.
Corporate level strategy is an overarching plan of action covering the various functions
performed by different SBUs. The plan deals with the objectives of the company,
allocation of resources and coordination of the SBUs for optimal perform-ance.
SBU level (or business) strategy is a comprehensive plan providing objectives for SBUs,
allocation of resources among functional areas, and coordination between them for
making an optimal contribution to the achievement of corporate level objectives.
Functional strategy deals with a relatively restricted plan providing objectives for
a specific function, allocation of resources among different operations within that
functional area, and coordination between them for optimal contribution to the
achievement of SBU and corporate-level objectives.
Exhibit5.1:DifferentLevelsofSBUs
70 Strategic Management
Apart from the three levels at which strategic plans are made, occasionally
companies plan at some other levels too. Firms often set strategies at a level higher
than the corporate level. These are called the societal strategies. Based on a mission
statement, a societal strategy is a generalised view of how the corporation relates
itself to society in terms of a particular need or a set of needs that it strives to fulfill.
Corporate-level strategies could then be based on the societal strategy. Suppose a
corporation decides to provide alternative sources of energy for society at an
optimum price and based on the latest available technology. On the basis of its
societal strategy, the corporation has a number of alternatives with regard to the
businesses it can take up. It can either be a manufacturer of nuclear power reactors, a
maker of equipments used for tapping solar energy, or a builder of windmills, among
other alternatives. The choice is wide and being in one of these diverse fields would
still keep the corporation within the limits set by its societal strategy. Corporate- and
business-level strategies derive their rationale from the societal strategy.
Some strategies are also required to be set at lower levels. One step down the functional
level, a company could set its operations-level strategies. Each functional area could
have a number of operational strategies. These would deal with a highly specific and
narrowly-defined area. For instance, a functional strategy at the marketing level could be
subdivided into sales, distribution, pricing, product and advertising strategies. Activities
in each of the operational areas of marketing, whether sales or advertising, could be
performed in such a way that they contribute to the funclional objectives of the
marketing department. The functional strategy of marketing is interlinked with those of
the finance, production and personnel departments. All these functional strategies
operate under the SBU-level. Different SBU-level strategies are put into action under the
corporate-level strategy which, in turn, is derived from the societal-level strategy of a
corporation. Ideally, a perfect match is envisaged among all strategies at different levels
so that a corporation, its constituent companies, their different SBUs, the functions in
each SBU, and various operational areas in every functional area are synchronised.
Perceived in this manner, an organisation moves ahead towards its objectives and
mission like a well-oiled piece of machinery. Such an ideal, though extremely difficult—
if not impossible of attainment—is the intent of strategic management.
Societal strategies are manifest in the form of vision and mission statements,
while functional and operational strategies take the shape of functional and
operational implementation, respectively.
Each SBU sets its own business strategies to make the best use of its resources
(its strategic advantages) given the environment it faces. The overall corporate
strategy sets the long-term objectives of the firm and the broad constraints and
resources within which the SBU operates. The corporate level will help the SBU
define its scope of operations. It also limits or enhances the SBU’s operations by
means of the resources it assigns to the SBU. Thus at the corporate level in
multiple-SBU firms, the strategy focuses on the “portfolio” of SBUs the firm
wishes to put together to accomplish its objectives.
For example, Mobil Corporation hired a new chief executive with the charge of
revitalising Montgomery Ward, one of its poor-performing SBUs. The SBU is being
pared down and turned into a specialty retailer since it has not been able to compete well
as a general merchandiser. Corporate-level management set goals and has its own
strategy (that of divesting Ward if it doesn’t perform); but the SBU has determined its
own strategy for how to redefine its business and compete effectively.
Exhibit 5.2: Relationship of Corporate Strategy and Functional Plans and Policies
at Single-SBU Firms
Exhibit 5.3: Relationship Among Strategies and Policies and Plans in Firms with
MultipleSBUs.
Some writers make distinctions between corporate strategy, business strategy, and
functional-level strategy, maintaining that corporate strategy focuses on the mission of the
firm, the businesses that it enters or exits, and the mix of SBUs and resource allocations.
Business strategy, then, focuses on how to compete in an industry or strategic subgroup, and
how to achieve competitive advantage. At the functional level, plans and
72 Strategic Management
policies to be carried out (by marketing, manufacturing, personnel, and so on) are
designed to implement corporate and business strategy to make the firm competitive.
Roger Smith, chairman of GM, has stated, “Unless we want to play a perpetual
game of catch-up, we ... have to do more than just meet our competition on a
day-to-day basis. We have to beat them in long- term strategy.” Choices about
how to compete should be considered in the decision about whether to exit or
enter a business, as our earlier example about Montgomery Ward illustrated. And
the implementation of a strategy will determine how effectively the choice will
be carried out. Hence, we believe that the process described here can assist in the
reader’s thinking about business and competitive strategy.
As mentioned before, the model in Exhibit 5.2 is for a single-SBU firm. For a multiple-
SBU firm the model is adjusted so that the process is conducted at corporate and SBU
levels. The results of these processes feed into one another. However, at both levels, the
process involves appraisal, choice, implementation, and evaluation.
Strategic decision making in multiple-SBU firms involves interrelationships
between corporate-level and business-level planning. As can be seen in
Exhibit.54 the corporate-level executives first determine the overall corporate
strategy. They do this after examining the level of achievement of objectives
relative to their SBUs and other businesses they could enter. Next they assess
how the SBUs are doing relative to each other and potential SBUs. Then they
allocate funds to the SBUs and establish policies and objectives with them.
Exhibit 5.4: A Model of the Strategic Management Process for a Firm with Multiple
SBUs using First-Generation Planning
At this point the SBUs analyse, within the guidelines set by the corporate level,
how they can create the most effective strategy to achieve their objectives.
This model is, of course, a simplified representation. Depending on various organisation
designs, the interrelationships among units and planning processes can be quite complex
Strategic Business Unit 73
Chapter 6
Environment - Concept, Components and
Appraisal
Understanding the environmental context of a company is of immense
significance. Successful strategies are the where the company adapts to
its environment. Companies that fail to adapt to their environment are unlikely
to survive in the long run, and tend, like dinosaurs, to disappear.
An example of this type of failure is provided by the near demise of the UK motorcycle
industry, which failed because it did not mount an effective strategic reaction to a major
environmental change—namely the emergence of its Japanese counterpart. Japanese
producers planned and managed their motorcycle industry on an international basis. i.e.
they built factories that were designed to serve the world market rather than just their
domestic market, thus having the advantage of economies of scale. Such a development
was a major competitive innovation to which the UK companies, with their much less
automated production and smaller sales targets, were unable to respond effectively.
Environment would be classfied as follows :
0 Macro environment
1 Industry environment
2 Competitive environment
3 Internal environment
We further classified these individual classes or segments. Thus, for instance, the
macro environment was further classified into:
0 Social factors, e.g. demographic changes
1 Technological factors
2 Economic factors, e.g. prime interest rates, consumer price index, etc.
3 Political factors
The process of environmental analysis presents the strategic planner with a dilemma: if
all those environmental elements that could have some influence on a company are
included, then the analysis becomes extremely complex and unwieldy. Alternatively, if.
in the interest of reducing the level of complexity, certain environmental elements are
omitted, then certain crucial environmental forces may be left out of the analysis. In
practice, deciding upon the appropriate balance between the width of environmental
analysis and its depth is frequently a function of the nature of the industry, and requires
knowledge, experience, and judgement on the part of the strategic planner.
In the discussion to follow, we would adopt a three stage approach to analysing
the environment:
Stage I: Segmenting the environment
Environment - Concept, Components and Appraisal 75
Exhibit6.1:ModelofEthics
There are a number of sources that could be used to determine what is right or wrong,
good or bad, moral or immoral behaviour. These include, for instance, the ‘holy’ books,
76 Strategic Management
the still small voice that many refer to as conscience. Indeed millions believe that
conscience is a strong guiding force. Others simply see conscience as a developed
response based on the intemalization of social mores. Other sources of ethical
guidance are what psychologists call ‘significant others’—our parents, friends, role
models, members of our clubs, associations, codes of ethics for organisations, etc.
Whatever the source, there is general agreement that persons have a
responsibility to avail themselves of the sources of ethical guidance, and
individuals should care about right and wrong rather than just be concerned
about what is expedient. The strength of the relationship between what an
individual or an organisation believes to be moral or correct and what
available sources of guidance suggest is morally correct is Type I ethics.
Type II ethics is the strength of the relationship between what an
individual believes in and the way he behaves. Generally, a person is not
considered ethical unless possessed of both types of ethics.
Social Responsibility
Organisational strategists have great influence over what is right or wrong because they
normally establish policies, develop, the company’s mission statement, and so forth.
When a corporation behaves as if it had a conscience, it is said to be socially
respon-sible. Social responsibility is the implied, enforced, or felt obligation
of managers, act-ing in their official capacities, to serve or protect the
interests of stakeholder groups other than themselves.
Business ethics is the application of ethical principles to business
relationships and activities.
Changing values towards social responsibility To understand the social responsibility of
a corporation, it is useful to begin by understanding an organisational constituency.
An organisational constituency is an identifiable group towards which
organizational managers either have or acknowledge a responsibility.
Clearly, every business organisation has a large number of stakeholders, some of whom
are recognised as constituencies and some of whom are not. An organisational
stakeholder is an individual or a group whose interests are affected by
organisational activities. Exhibit 6.2 depicts a typical illustration of organizational
stake-holders, those marked with asterisks being likely to be considered constituencies.
Even though no manager can reasonably consider all stakeholder interests at a time,
some strategists claim to try. The great questions a strategist has to face would go
like this, ‘During an economic downtrend, should employees be afforded continuous
employment even when this is not in the long-term best interest of the owners of the
corporation and does not accord with their preferences? Should managers be
concerned about whether suppliers receive a reasonable profit on items purchased
from them or should management simply buy the best inputs at the lowest price
possible?’ Many corporate strategists cop out on such questions by simply assuming
that the long-term best interest of the common stakeholders should reign supreme.
What happens, however, when stakeholders have interests that are in conflict? That
is when the ethical considerations
Environment - Concept, Components and Appraisal 77
Government Society
The
Organisation
Other
organis- Groups
ations
Individuals
Obligations to Individuals
It is through joining organisations that individuals find healthy outlets for their energies.
From the church they expect guidance, ministerial services, and fellowship, and they
devote time and money for its sustenance. From their employers they expect a fair day’s
pay for a fair day’s work—and perhaps much more. Many expect to be given time off,
usually with pay, to vote, perform jury service, and so forth. Clubs and associations
provide opportunities for fellowship and for community service. To the extent that these
expectations are acknowledged as responsibilities by the organisations involved, they
become part of the social contract.
Obligations to Government
Government is the most important party to the social contract. Under the auspices of
the government, companies have licence to do business. They have written patent
rights, trade marks, and so forth. Churches are often incorporated under state laws
and given non- profit status. Many quasi-governmental agencies, such as the Federal
Depository Insurance Corporation, Regional Planning Commission, Levy Boards,
have been allocated special missions by the government. In addition, organisations
are expected to recognise the need for order rather than anarchy and to accept some
degree of government intervention in organisational affairs. The inspection rights of
Occupational Safety and Health Administration function-aries are cases in point.
Family units: Family units have generally become less stable; there has been an
increase in the level of divorce and increasing tendency of young people to leave home
and live apart form their parents. This has implications for promotion, packaging, etc.
Religion: There has been a decrease in the power of churches and their appeal,
especially to young people. This has had a major influence on such issues as
how people spend their leisure, the types of moral attitudes that are socially
acceptable, retail opening hours.
Geographical mobility: The advent of cheap international travel has greatly
increased scope for international travel both for business and pleasure. It has
also greatly increased peoples’ knowledge of foreign environments and tended to
make goods and services more ‘cosmopolitan’.
Domestic mobility: The development of mass motoring has meant a major social
change not just in recreation but also in retailing. This has been helped by a rise in
freezer ownership. Thus many retailers have moved from down-town sites to out- of-
town shopping centres with good parking facilities. Similar increased ownership of
freezers has tended to change daily ‘necessity’ shopping to the weekly shopping trip.
The role of women in society: With the great increase in proportion of women
working outside the home and the development of equal opportunity legislation,
there has also been a change both in society’s attitude to the role of women as also
women’s personal attitude about themselves. Thus there has been a diminution in
the domestic role of women and an increase in their broader role in society. This has
found reflection in their purchasing habits and product choices.
Attitude to work: is evident that there has been a distinct change in workers’
attitude to work and the consequent need for strategic change to accommodate it.
Economic Environment
The significant indicators of the economic environment would include:
Growth rate in productivity
Rate of inflation
Individual savings rate
R&D expenditure as a percentage of GNP
The key domestic social and economic goals would include:
Revitalisation of cities
Cleaner environment
Quality education
Old age security
The key economic environmental problems of recent and current times appear to be:
Controlling inflation
84 Strategic Management
Modernising industry
Taking care of energy shortages
Growing international interdependence
National economic factors. These are
Controlling Inflation
A major long-term political issue in combating inflation is whether high
employment and non-inflationary economic growth can be achieved simultaneously.
The continuation of economic restraint and unemployment to suppress inflation can
only lead to further development of a ‘welfare state’ and the trend appears to be
exactly the opposite the world over. The inflationary impact of demand expansion
policies, however, will require greater wage-price flexibility, productivity and
advance capital investment to ensure supply availability. Such growth policies
would, therefore, require changes in environmental and other regulatory provisions.
Modernising Industry
To be internationally competitive, industry must seek economies of scale to
sustain comparative advantages in efficiency and productivity. This requires
continued capital investments and the application of technological innovations
from research and development to reduce unit cost and to lead to the introduction
of new and more efficient products and processes.
export policies of Japan, for example, have significantly influenced US and Western
steel, auto, radio, and electronics industries. The transfer of Eurodollars to high interest
paying countries can significantly affect exchange rates and corresponding corporate
currency adjustments (often forcing significant accounting losses or gains). The growth
in world trade also causes inflation to spread rapidly from one economy to another.
Less developed countries that control scarce resources such as oil have increased the
abundance of capital at their disposal. Important exporting nations such as Brazil,
Korea, Taiwan, and now the South East Asian countries like Indonesia, Malaysia,
Thailand, and Singapore are becoming industrialised and thus prospective members
of the developed world. Simultaneously a host of less developed countries mostly in
Africa are near bankruptcy. Intervention by international financial Institutions like
the International Monetary Fund or the World Bank are hardly assisting in
countering the trend. Countries with balance-of-payments surpluses are becoming
significant world bankers. Those with balance -of-payments difficulties are being
forced into severe financial difficulties and basic problems of survival.
In sum, because of the influence of global economic events, it is usually inadequate
to consider national economic policies without taking cognizance of the broader
global economic context in which all national economies must exist. This broader
economic context must include an assessment of such fundamental indices as:
Performance of the major industrial countries in their
Rates of inflation
Real growth rate of GNP
Current account balances
Levels of employment
Interest rates
Such an appraisal should enable a judgement to be made about the general state
of world economy and its stage in the ‘business cycle’.
Information on and analysis of other global issues such as
The economic development and performance of nations
Global efforts at monetary reforms
The behaviour of currency markets
Commodities
Trade talks
Activities of the International Monetary Fund
Activities of the World Bank
Third World indebtedness
there was fear that this would result in a number of developing countries defaulting
on their debts to major US banks, with consequent increase in US interest rates. The
recession which began in 1979 was a worldwide phenomenon, and this was also the
case with the recovery which began in 1983. International travel is more feasible
than it has ever been in the past, and more and more companies engage in
international business. Every organisation is affected by worldwide forces.
In short, the economic facet of the environment is a rapidly changing one, but
the more it changes, the more it remains the same. Organisational strategists
must still compete on an economic basis. As long as prices for goods and
services are set in free markets, it will be on the basis of economic variables that
an organisation sets its goals and measures its performance.
Political Environment
In democratic countries, business excesses generated disenchantment and a growing
demand for more ‘humanist’ goals to equalise income distribution and end poverty and
suffering. Such pressures had caused the trend towards the ‘welfare states’ in which the
state (a) diverts resources into various welfare projects, (b) establishes compulsory
insurance schemes, e.g na-tional health care, and (c) affects worker motivations to
contribute. Thus, in the USA, rent subsidy, negative income tax, welfare payments, and
a food stamps programme were established to raise the living standard of the poor.
Continued pressure for ‘welfare states’ will in all probability grow and affect
many nations, organisations and individuals in the following ways:
Total taxes and government spending will increase drastically,
Worker penalties for welfare recipients will create dysfunctional worker
motivation,
Any government administration will find it well nigh impossible to reverse the
trend towards greater welfare benefits,
Resource allocation decisions will increasingly be made on philosophical or
political grounds rather than on economic criteria,
Increased worker taxation on incremental income will encourage worker
absenteeism.
Government dependence will decrease worker motivation through lack of ‘care’
or worry.
This trend may, however, result in business sales stagnation leading to economic and
industrial decline and depression. In short, carried too far and without compatibility with
economic considerations, the ‘welfare state’ trend would in all probability conflict with
economic progress and viability. Indeed, in more recent times it has already happened in
many countries and the trend towards the welfare state has been reversed.
Perhaps the political environment needs to be looked at from certain other viewpoints as
well. Corporations today spend hundreds of millions of dollars on political contributions
and lobbying. These contributions are some-times designed to support principles that
corporate executives believe are worthwhile for society. More often, however, they tend
to be self-serving. This is evident from the fact that few political contributions are
88 Strategic Management
Technological Environment
Technological change results when new ideas are applied to existing problems
for the purpose of economic and social development. As with all economic and
social changes, the acceptance of technological innovations takes a significant
period of time, and it is also a reflection of rapidly increasing environmental
turbulence that this time span is constantly decreasing.
Recent times have seen the development of new products and processes with increasing
frequency. The uncertainties and slow pace of development of technological innovations
make investments on them high risk. The potential pay-off for winning innovations can,
Environment - Concept, Components and Appraisal 89
Industry Environment
To analyse industrial environment we should begin by understanding its purpuse.
The purpose of studying industrial environment or analysing industry structure is
to gain an understanding of the competitive relationships among groups of firms
that compete for a specific market. The first step is a broad analysis of industry
environment. This is illustrated in Exhibit 6.7.
Environment - Concept, Components and Appraisal 91
Industry trends
Industry Competition
Market size/age number/size/
attractiveness power
Exhibit6.7:IndustryStructure
Structural Mapping
One method that may be used to examine industry structure is termed structural
group mapping. The map is developed by plotting competing firms on two
industry dimensions; for example, product quality versus distribution channels.
To give an added dimension of strategic input, the area of each circle
representing a company may be made proportional to its market share. When
these two-dimensional plottings are stretched together, the dominant strategy of
each competitor and its effectiveness shows up quite distinctly.
We discuss here two models for strategy formulation in which industry and
industrial environment analysis plays a key role.
Stars Question
mark
Net users
of resources or
Dogs liquidated
Cash Cows
High Low
Competitive Environment
The best method for carrying out a study of the competitive environment is
through a structural analysis. Exhibit 6.11 provides a model.
Potential Entrants
Threat of
entrants
Suppliers Buyers
Competitive
Bargaining Rivalry Bargaining
Power Power
Threat of
substitutes
Substitutes
competitors, and a large number of firms holding in the mid -ranges with lower
performances. This pattern emerges clearly when comparing sales volume with
profitability. Large firms tend to dominate industry by achieving economies of
scale, with resulting cost advantages. Smaller firms main-tain a high profit with
lower volume by focusing on a specialized market segment.
Mid-range firms remain at the bottom, being unable to realize competitive
advantage. Being unable to take advantage of economies of scale and not having
adopted the focusing strategy, they are ‘stuck in the middle’.
Competitive analysis provides the framework for diagnosing strategic forces in
the environment. It can help prioritize strengths and weaknesses, and locate
possible vulnerabilities of rivals: a ‘strategic window’ of opportu-nities that the
strategist may be able to exploit. Competitive analysis should be an ongoing
process if strategy formulation is to be effective. The strategy maker must
identify the key success requirements for each industry situation.
The strategic window concept refers to the timing of marketing opportunities. It is
easier to enter when the window opens and difficult to do so after it closes. Thus
IBM missed the laptop PC market window, the opportunity being taken by Zenith’s
Z-181. By the time the IBM laptop PC came to the market, the window was closed.
The important and related aspects of ‘timing’ and ‘when’ require reference at
this point. While discussing the concept of strategic windows, we referred to the
failure of the IBM laptop PC as against Zenith’s Z 181. It is not as if IBM lacked
the resources or key success requirements, nor was there any error in choosing
the field of diversification. What was missing, however, was an adequate
strategic concept about the ‘timing’ of the move. In all strategic decisions, it is
not enough only to look at opportunities and strengths. The third and critical
element of successful crafting of strategy is choosing the time element correctly.
Market Identification
At this stage the company attempts to identify in its environment market opportunities
that it may be able to successfully exploit. This is when marketing research is
undertaken in order to ascertain the extent and nature of opportunities, and to assess the
company’s internal ability to exploit them. At this stage there is general lack of detail in
the proposed actions; it is essentially exploratory and is really concerned with seeing if
there is a possible match between the market and the company’s capabilities, in-cluding
its existing (and potential) range of products or services.
Market Segmentation
Frequently used bases of segmentation for consumer goods include:
Demography: age, sex, family size, income, occupa-tion, religion, race, etc.
Geography: country, region, city, town, climate, etc.
Social basis: class, education, occupation, etc.
Product function: use sought, benefit sought, rate of usage, etc.
Buyer behaviour: of actual and potential consumers.
It should be noted that market segmentation is often more straightforward for
consumer goods than for industrial goods because of the great range of uses to
which many industrial goods can be put and also because there is much greater
customer heterogeneity.
The criteria for deciding which segments are most attractive will vary from industry
to industry, but in general the following tend to be considered important influences:
Current and future growth rate of the segment in terms of volume and value.
The degree and nature of existing competition: threats of new entrants, threats of
substitutes, power of buyers, level of rivalry among existing competition,
levels of profitability.
Product Positioning
Once a company has decided upon the target markets, the next stage is to determine
how it ought to position its products in these in relation to competitors’ offerings.
This involves assessing how competitors’ products meet customers’ needs and then
developing marketing strategies to meet these needs belter. Product positioning is a
Environment - Concept, Components and Appraisal 99
vital part of the process, because it is here that managers must ‘see to the heart’
of the reason for competitors’ success and more importantly, decide upon how
they will position their own products or services so that consumers are induced
to buy these. It is suggested that this can be accomplished in three steps:
Decide upon the criteria that distinguish the various products currently available
in the target market.
Draw up a series of product pricing maps for competitors. This graphically
shows how products compete, using two key customer criteria as axes. The
products are represented by circles whose areas are proportional to their
annual sales. Exhibit 6.12 illustrates such a map.
Decide upon possible positions for the company’s product on the product
positioning map and define the qualities associated with the position chosen.
Product Strategy
‘Product’ activities are concerned with developing products (and their associated
services) or services that satisfy customer needs effectively. Among the more
important features that distinguish products are the following:
Quality: What is the relative quality of the product and its associated services, in
relation to the competing products that are available?
Features: What particular features does the product have that distinguish it
from competing products?
Options: Are there options that are not available on competing products?
Product Place Promotion Price
Place Strategy
‘Place’ activities are concerned with deciding upon where the product will be sold,
the method of distribution, and associated discussions such as inventory levels.
The distribution strategy and practices adopted by a company should flow from
its corporate marketing strategies. It is important that the relationship has this
direction, because discussions about distribution have such far-reaching strategic
implications. The more important of these include:
Responsiveness to customers’ needs and wishes: The nature, level, and
quality of customer service will be strongly influenced by the chosen
method of distribution.
Profitability: The method of distribution chosen: in most cases there is a choice
of method, usually calling for a trade-off between the costs and benefits of
alternatives.
Environment - Concept, Components and Appraisal 101
Promotion Strategy
The third element in the marketing mix is ‘promotion’. This could be considered the
process through which a company communicates with and influences its target
market segments, with the goal of helping to position its products and services in
their desired locations and generating the desired responses from them.
Promotion, apart from having the goal of generating maximum sales at
minimum cost, also has the following generic goals:
Awareness
Companies frequently wish to develop in their target audience just an awareness
of their products, their brands, their services, and even their existence. This may
be used to,
Develop potential customers’ memories of the existence of a new product or
service, particularly at the time when it is first offered.
Refreshing existing customers’ memories of the existence of a company, a brand,
a product or a service, through reminders of its existence. This is often the
goal behind the promotion of products that are at a mature stage in their
product life cycle.
102 Strategic Management
Attitude
The generic goal ‘attitude’ is somewhat similar to the ‘awareness’ goal, in that
when a promotion has such a goal, its aim is to leave primarily the targeted
sector with a desired attitude of mind towards a product, a service or, indeed, an
issue, and the desired attitude may not result in action. Thus, for instance in a
campaign about AIDS (acquired immuno-deficiency syndrome,), the goal could
conceivably be to develop twofold attitudes: to prevent the spread of AIDS and
to allay people’s fears and misconceptions about its transmission.
Competitive Signals
In general, the primary goal of any promotion strategy should be to help the
company achieve its marketing goals. More specifically, it will often be the case that
the promotion goals will be to ensure that blend of promo-tional devices which will
achieve the maximum degree of influence in targeted market segments at minimum
cost. Thus any promotion strategy should contribute to the marketing process by:
being appropriate to the product and to the market segment that has been
identified and is being targeted;
helping position the product in the desired local ion in the segment;
being appropriate to the means of distribution chosen;
being appropriate to the resources which the company has.
Companies may, however, use promotion to signal to their competition, and
other interested parties, selected information about themselves. The information
could include strategic intentions, future goals, or internal health.
Price Strategy
Traditional economic theory claims that price is the primary basis of competition
and the primary determinant of demand. Empirical evidence and casual
observation suggests that this is often not true. Indeed, price is just one element
of the marketing mix that may be employed to achieve the company’s marketing
objectives. A quotation from Porter would be relevant in this connection.
‘Some forms of competition, notably price competition, are highly unstable and
quite likely to leave the entire industry worse off from the standpoint of profitability.
Price cuts are quickly and easily matched by rivals, and once matched they lower the
revenues for all firms unless industry price elasticity of demand is high enough.
Advertising battles, on the other hand, may well expand demand or enhance level of
product differentiation in the industry for the benefit of all firms.’
This is primarily why a more satisfactory approach is to use price in conjunction with
other complementary elements—product, place and promotion—in the market-ing mix.
A company’s pricing strategy should:
help the company achieve its corporate goals in such areas as profitability,
market share, growth, range of products, etc;
help the company achieve its more specific marketing goals such as market
share, market growth rate, etc;
Environment - Concept, Components and Appraisal 103
Demand Influences
This is the area where the concept of ‘elasticity’ most comes into play. The demand for a
product is a fundamental influence on pricing strategy, just as price of a product is a
fundamental influence on the demand for it. The two are mutually dependent. Generally,
the higher the price charged for a product, the less will be the volume of demand and
vice-versa. Consequently, when planning price strategies for products that have high
price elasticity of demand (such as international air travel), particular attention must be
paid to the consequences of price changes. When such a view of pricing prevails,
companies should endeavour to develop accurate sales forecasts or simulation of the
demand consequences that different pricing strategies are likely to have.
Competitive Influence
Most products and services are not unique: they must compete with rivals or
substitutes. Consequently, pricing strategies will normally require response to
the nature of competition. This type of pricing strategy is one where the price
charged for a product or service is strongly influenced by prices charged by
competitors. There may, however, be two exceptions:
Prices charged by the market leader, who sets the tone for prices charged by
competitors and hence decides his own price based on other strategic
considerations.
Markets of differentiated products, in which case the impact of competitive
prices is less significant. The price fixed in such cases is strongly
influenced by demand considerations, superimposed by the fact that a
higher price tends to signal superior quality.
Cost Influences
The cost of manufacturing a product or providing a service will be a fundamental
influence in pricing strategy. A price below cost will ultimately lead to extinction
while a price too high in relation to cost will encourage new entrants and stimulate
customers to use substitutes. The principal types of cost-based strategies are:
Cost plus pricing
104 Strategic Management
Target pricing
Marginal cost pricing
Target Pricing
The kernel of this strategy is that the price to be charged for a product should be set
by meeting the predetermined return on capital employed to produce and market it.
Target pricing has an underlying assumption that the company setting the target price
has the power to see that it is indeed followed in the industry and that its sales volume
and market share remain unimpaired. Consequently, this type of pricing strategy tends to
be adopted successfully only by companies that have this degree of power.
The importance to the company under analysis of each segment of the environment
that has been analysed is ranked on an ordinal scale ranging from 0 to 5. Thus
a segment considered to be of crucial importance is ranked 5; one of average
importance scored 3, and one of no importance is scored 0.
Once the importance of each segment has been determined, the strength of each
factor in the period under analysis is then ranked on an ordinal scale from
– 5 to +5. The lower limit indicates that this factor is likely to have as
strong a negative influence on the company as possible. A score of +5
indicates that the segment under consideration is likely to have as strong a
positive influence on the company as possible. Finally, a score of 0
indicates that the factor does not have any influence whatsoever.
When the importance and strength of each factor have been determined, these two
numbers arc multiplied and the ordinal score for each relevant segment in the
environment is obtained. However, these scores cannot be summed up.
Rather, they show individually the likely relative impact of each segment on
the company. This can also be graphically depicted on the environment
assessment diagram Exhibit 6.15 for a more ‘live’ demonstration.
Exhibit 6.21 summarises the effect that public issues can have on political action. By
overlaying the five dimensions of political actions, the point at which a, ‘critical
mass of support comes together can be identified as the ‘take off point for action.
From that point on, momentum can be expected to increase and create intense
Number
of
Articles
[Take off]
Number
of
supporters
laws
possibly influence political outcomes. Low priority issues still need watching in case
they develop in combination with other issues which may change their importance.
We are, however interested in environmental analysis from the point of view of strategic
implementation and consequent strategy formulation. For that we have to look at,
environmental evolution,
the process of environmental analysis and, finally,
integrate environmental analysis into strategic analysis.
We briefly elaborate these three stages.
Environmental Evolution
Three constructs are useful to describe changes in the environmental segments:
Types of changes,
forces driving change, and
types of future evolution.
Changes in the macro-environmental segments may be systematic or
discontinuous. Gradual, continuous, and potentially predictable changes are termed
systematic. While random, unpredictable, sudden changes are termed discontinuous.
For analytical purposes, it is important to go beyond description of change to
assess the Ibices driving it.
Sometimes, forces driving change in one segment, lie in changes in other segments.
Thus shifts in social segments (for example migration of the population) may affect the
political segment (for example distribution of regional power). Usually, however, each
segment evolves quasi-autonomously. That is why the existence of inducements and
autonomous evolution resulting in changes in segments should be analysed
independently as well as in conjunction with identifying the underlying forces.
Often, driving forces interact with one another. Such interaction may be
reinforcing, conflicting or disjointed. When the forces support one another in terms of
their effect on changes in a third segment, the effect may be reinforcing. When they
dampen one another, they are conflicting, and when they do not affect one another, they
are disjointed. In addition, the effects of changes in one segment may have primary or
secondary consequences for other segments. When the effects are direct, they are
Environment - Concept, Components and Appraisal 111
termed primary consequences. In some cases, changes may not have a direct impact
on other segments; however, consequences may ensue as a result of direct effect on
a third segment. These are termed secondary consequences. Finally, in charting the
evolution of change in the future, it is important to characterise whether such
evolution is completely predictable from the present trends or whether it is
contingent upon actions of the firm or other entities in the environment. This refers
to closed and open versions of the future, respectively. This distinction is often
critical: in contrast to the closed version, the open version should alert organisations
to potential action domains that needs further analysis, or where firm-level
responses may enable it to shape the future evolution of the change.
Scanning
In its prospective mode scanning focuses on identifying precursors or
indicators of potential environmental changes and issues. Environmental
scanning is thus aimed at alerting the organisation to potentially significant
external impingement before it has fully formed or crystallised. Successful
environmental scanning draws attention to possible changes and events well
before occurrence, allowing time for suitable strategic actions.
Monitoring
Conception of
environment Scanning Medium term
Forecasting
'Outside in'
'Inside out' Surprises
Long term
Organizational
context
Exhibit6.23:EnvironmentalAnalysisActivities
112 Strategic Management
In the prospective mode, scanning is part of an analytical activity and becomes useful
when environmental changes take time to unfold, as is indeed often the case. For
example, social value shifts do not occur in just days or even months, technological
changes often take years, as may the developement of large-scale social movements.
Scanning in the current and retrospective sense identifies surprises or strategic
issues requiring immediate action on the part of an organisation. In this case, the
out-puts may feed directly into assessment and influence the current and imminent
strategic decisions of an organisation. Scanning frequently detects environmental
change that is already in an advanced stage; a change that has already evolved to a
point where it is actual or imminent rather than potential at some, as yet unspecified
date. Thus a scan of demographic data might pick up population movement or
changes in household formation. Scanning frequently unearths actual or imminent
environmental change because it explicitly focuses an organisation’s antennae on
areas that may previously have been neglected, or it challenges the organisation to
rethink areas to which it had earlier paid attention.
It is important to recognise that scanning is the most ill-structured and
ambiguous environmental analysis activity. The data sources are many and
varied. Moreover, a common feature of scanning is that early signals often show
up in unexpected places. Thus the purview of search must be broad.
Partly in consequence, the noise level of scanning is likely to be high. In
consequence, the fundamental chal-lenge for the analyst in scanning is to make
sense of vague, ambiguous, and unconnected data, and to infuse meaning into it.
Three critical decisions during scanning need high-lighting.
First, the scope and breadth of data and data sources inevitably influence the analyst’s
perceptions. Second, the data do not speak by themselves: the analyst has to breathe life
into them. Third, critical acts of judgement are required of the analyst in his or her
choice of events and/ or precursors to consider for monitoring, forecasting, and/ or
assessment. All these entail skill and expertise on the part of the analyst.
Monitoring
Monitoring entails tracking the evolution of environmental trends, the sequences of
events, or streams of activity. It frequently involves following the signals or indicators
unearthed during environmental scanning, and in this sense is a follow up process.
The purpose of monitoring is to assemble sufficient data to discern whether
certain patterns are emerging. Two comments are relevant in this regard.
First, they are likely to be a complex of discrete trends. For example, an emergent life-
style pattern may include changes in entertainment, education, consumption, work habits
and domicile—location preferences. In the initial stages of monitoring, the patterns are
likely to be hazy because they are the outputs of scanning: the analyst has only a vague
notion of what to look for. Second, highly formalised and quantified databases usually
found in archives of organisations represent a characterisation bused on a previously
identified pattern and may be of only limited utility in tracking emergent patterns.
In monitoring, the data search is focused and much more systematic than in scanning.
By focused, it is meant that the analyst is guided by a priori hunches. Systematic refers
Environment - Concept, Components and Appraisal 113
to the notion that the analyst has the general sense of the pattern/ (s) he is
looking for and collects data regarding the evolution of the pattern.
As monitoring progresses, the data frequently move from the imprecise and
unbounded to reasonably specific and focused. Thus, for example, in tracking the
emergence of social issues, the first indicators are feelings of discontent or loosely
distributed concerns expressed by a few individuals. These sentiments gather
support and gradually what is often referred to as a social movement begins to
evolve. Environmentalist movements at national levels are a case in point.
A number of data interpretations or judgements are unavoidable in monitoring.
These judgements are often complex, further confounded when individuals
within the same organization make different and often conflicting judgements.
The outputs of monitoring are threefold:
a specific description of environmental patterns to be forecast,
identification of trends for further monitoring, and
identification of patterns requiring further scanning.
Forecasting
Scanning and monitoring provide a picture of what has already taken place and
what is currently happening. However, strategic decision-making requires a
further orientation; it needs a picture of what is likely to happen. Thus
forecasting is an essential element in environment analysis.
Forecasting is concerned with the development of plausible projections of directions,
scope, speed, and intensity of environmental change, to lay out the evolutionary path of
anticipatory change. There are two conceptually separable, though integrally related,
activity elements in forecasting. The first concerns projections based on trends that are
evident and can be expected, with some margin of error, to continue unabated in a given
period of time into, the future. Demographic trends would be suitable examples. The
second relates to alternative futures that may come about not only on the basis of
current trends but judgements regarding events that may take place or that may be made
to happen by an organisation or entities outside it. Forecasting, based on projections,
involves a closed perspective whereas forecasting based on alternate futures corresponds
to a version of open perspective.
There are a number of key analytic tasks and outputs involved in forecasting. The
first concerns untangling of forces that drive the evolution of a trend. This is a
necessary prerequisite to charting out the trend’s evolutionary path. The second
concerns understanding the nature of the evolutionary path: that is whether the
change is a fad or of some duration, or cyclical or systematic in character. The third
concerns more or less clearly delin-eating the evolutionary path or paths leading
to projections and alternative futures. The critical outputs of forecasting are specific
understanding of future implications of current and anticipated environmental
changes and decision-relevant assumptions, projections, and information.
Since the focus, scope, and goals of forecasting are more specific than in scanning and
monitoring, forecasting is usually a much more deductive and rigorous activity. A wide
114 Strategic Management
Assessment
Scanning, monitoring, and forecasting are not ends in themselves, unless their
outputs are assessed for their implications for the organisation’s current and
potential strategies. Scanning, monitoring, and forecasting merely provide nice-
to-know information. Assessment involves identifying and evaluating how and
why current and projected environmental changes will affect strategic
management of an organisation. In assessment, the frame of reference moves
from understanding the environment— the focus of scanning, monitoring and
forecasting—to identifying what that understanding of environment means for
the organisation. Assessment thus endeavours to answer the question: what are
the implications of our analysis of the environment for our organisation?
From the perspective of linking environmental analysis and strategic
management, the critical question is: what is likely to be the positive or negative
impact of environmental patterns on the firm’s strategies? This question compels
linking of environmental patterns and the organisation’s context. Those patterns
judged to have already had an impact on the organisation’s strategy or to possess
the potential to do so are deemed to be issues for the organisation.
Criteria against which specific patterns should be judged include the following:
How might the pattern have an impact on the organisation?
What is the probability that the pattern will develop and become clearly
recognisable?
How great will be the eventual impact on the organisation?
When is the issue likely to peak—near term, medium teem, long term?
The intention of the first criterion is to determine whether the pattern has or will
have an impact on the organisation. The other criteria follow in the analysis in
logical sequence. Issues can then be conveniently arrayed on a probability-impact
matrix, as shown in Exhibit 6. 24, with a separate matrix being prepared for each of
the three planning periods: short, medium, and long term. The merits of the matrix
display are that it provides a comprehensive, at-a-glance array of issues, orders them
in a way that facilitates discussion and planning, and places them in time-frames
appropriate to the allocation of resources and management attention.
Temporal Cycles
Exhibit 6.23 portrays the multiple time-bound cycles in environmental analysis. Surprises or
discrete issues encountered during early scanning activities may require immediate action on
the part of the organisation, implying the short time cycle. Similarly, monitoring activities
may engender short and medium-term actions. What is important to emphasise is that they
have to be considered in entirety and their implications considered separately.
Corporate Strategy
At the level of corporate strategy, environmental impact on three key issues
needs to be considered:
patterns of diversification,
portfolio planning, and
risk-return trade-offs.
Patterns of Diversification
There are at least three modes by which the environment influences patterns of
diversification. First, firms differ in terms of the synergies they seek to exploit
across their businesses. These synergies could be upset or enhanced by macro-
environmental change. Second, different pat-terns of diversification manifest
different vulnerabilities. Macro-environmental changes may amplify these vulner-
abilities. Third, macro-environmental trends may open up or close out existing
patterns of diversification. Deregulation of industries is one such change.
Portfolio Planning
Macro-environmental trends have important implications for the bases of
portfolio planning. Typical portfolio approaches focus on a business’ competitive
advantages within an existing industry, constrained by the financial resources of
the firm. Ansoff notes that macro-environmental trends may necessitate portfolio
planning based on such bases as resources or technology.
Environmental analyses are also particularly important for planning the potential
future portfolio. Product portfolio approaches arc useful for portfolio planning
within the existing set of businesses, or at best pointing out the direction of
search for additional businesses. The specific businesses to be targeted need to
be considered in the light of macroenvironmental forecasts and predictions.
Risk-Return Trade-offs
Political, economic, technological, and demographic shifts have an impact on the
returns and risks of existing and planned portfolios. It is important to consider
environmental impacts on each of these characteristics of corporate-level strategy.
Business Strategy
Industry structure changes in the macro-environment may affect
the boundaries of the industry,
the forces shaping industry structure, such as suppliers, customers, rivalry and
product substitution, entry barriers,
strategic groups,
the key success factors, and
Environment - Concept, Components and Appraisal 117
Mega Trends
Finally, certain broad trends in the external environment having consequent
impacts on a firm’s working need to be noted and accounted for. Ten such trends
or influences are a movement from:
an industrial to information society;
forced technology to a matching of each new technology with a compensatory
human response (‘hi-tech—high touch’);
a national to world economy;
short-term to long-term considerations, with emphasis on strategic planning;
a period of centralisation to decentralisation of power;
reliance on institutional help to greater self-reliance;
representative democracy to more participative democracy, in politics as well as
at the workplace;
our dependence on traditional hierarchical structures to an informal network of
contracts;
the north and west to the south and east geographically and economically;
a society with a limited number of personal choices to a multiple-option society.
The final product of environmental analysis is its contribution to strategic thinking
and its input for the development of a strategic plan for the business. Merely
interesting studies will not suffice. More relevant and specific contributions include
the development of planning as-sumptions, the framing of issues for strategy
development, and the pursuit of studies of strategic environmental issues. A possible
matrix approach to issue identification is presented in Exhibit 6.25.
When a set of coherent and comprehensive environmental assumptions is
developed, it becomes the first and most obvious input in the strategic plan. This is one
leg of the three-legged stool on which strategy development rests (the other two being
resource analysis and strategy concept), so it is important that it should be sturdy. The
environment analysis chapter of the strategic plan should, at the very minimum:
identify the key forces operating in the business environment (past, present, and
future);
make explicit the assumptions about their future course;
analyse the strategic significance of these factors—the threats, opportunities, and
issues that they pose;
Environment - Concept, Components and Appraisal 119
highlight the major contingencies (and their trigger points) for which
contingency plans should be developed.
Issues should be framed in an orderly and disciplined way, so that constructive
strategies can be developed to respond to these. A suggested framework for this
framing is the following eight-step sequence which organizes the necessary
information to focus on the necessary strategic responses:
Definition of the issue: a succinet (one-sentence) statement of the issue, from the
point of view of business strategy.
Strategic significance: identification of the threats and opportunities posed by the
issue.
Driving forces: the key environmental lorces that converge (now and in the
future) to make this an issue.
Prospects: the potential outcomes and developments of the issue under
alternative scenarios.
Planning challenges: a set of ‘need to....’ statements listing out the overall actions
required of the business to maximise the opportunities and minimise the threats.
Strategic responses: a set of specific strategy alternatives to be considered as
ways of implementing the ‘need to....’ statements.
Finally, environmental analysis should be the source of those in-depth studies of
critical external trends and factors—inflation energy prospects, global
competition, new technology—which may require detailed and specific analysis
because of their special significance for business strategy.
120 Strategic Management
Chapter 7
Organisational Dynamics and Structuring
Organisational Appraisal
The appraisal of the external environment of a firm helps it to think of what it
might choose to do. The appraisal of the internal environment, on the other hand,
enables a firm to decide about what it can do.
This chapter deals with the internal environment of an organisation. We shall
build a foundation for understanding the internal environment through an
explana-tion of its dynamics. This has been done by refering to the resource-
based view of strategy. The resources, behaviour, strengths and weaknesses,
synergy, and compe-tencies constitute the internal environment, and we shall
deal briefly with each of these aspects initially. All these together determine the
organisational capability that leads to strategic advantage.
Organisational capability could be understood in terms of the strengths and
weak-nesses existing in the different functional areas of an organisation. We shall
consider six such areas: finance, marketing, operations, personnel, information
management and general management. For each of these, we shall mention the
important factors influencing them and clarify the nature of the various
functional capability factors through illustrations.
We deal with the factors that affect appraisal, the approaches adopted for appraisal,
and the sources of information used to perform organisational appraisal. With regard
to the methods and techniques used for organisational appraisal, we consider a range
of factors grouped under the three headings of internal analysis, comparative
analysis, and comprehensive analysis. The application of these methods results in
highlighting the strengths and weaknesses that exist in different functional areas.
We attempt to understand the internal environment of an organisation in terms of
the organisational resources and behaviour, strengths and weaknesses, synergistic
effects, and competencies.
An organisation uses different types of resources and exhibits a certain type of
behaviour. The interplay of these different resources along with the prevalent behav-
iour produces synergy or dysergy within an organisation, which leads to the develop-
ment of strengths or weaknesses over a period of time. Some of these strengths make
an organisation specially competent in a particular area of its activity causing it to
develop competencies. Organisational capability rests on an organisation’s capacity
and ability to use its competencies to excel in a particular field.
Organisational Dynamics and Structuring Organisational Appraisal 121
Strategic advantage
Organisational capability
Competencies
Synergistic effects
Organisational Resources
The dynamics of the internal environment of an organisation can be best understood in
the context of the resource-based view of strategy, According & Barney (1991), who is
credited with developing this view of strategy as a theory, a firm is a bundle of resources
—tangible and intangible—that include all assets, capabilities, organisational processes,
information, knowledge, and so on. These resources could be classified as physical,
human, and organisational resources. The physical resources are the technology, plant
and equipment, geographic location, access to raw materials, among others. The human
resources are training, experience, judgement, intelligence, relationships, and so on,
present in an organisation. The organisational resources are the formal systems and
structures as well as informal relations among groups. Elsewhere, Barney has said that
the resources of an organisation can ultimately lead to a strategic advantage for it if they
possess four characteristics, that is, if these resources are valuable, rare, costly to imitate,
and non-substitutable.
Like individuals, very few organisations are born with a silver spoon in the
mouth; most organisations have to acquire resources the hard way. The cost and
availability of resources are the most important factors on which the sucess of an
organisation depends. If an organisation is favourably placed with respect to the
cost and availability of a particular type of resource, it possesses an enduring
strength which may be used as a strategic weapon by it against its competitors.
Conversely, the high cost and scarce availability of a resource are handicaps
which cause a persistent strategic weakness in an organisation.
122 Strategic Management
But the mere possession of resources does not make an organisation capable.
Much depends on their usage within an organisation.
Organisational Behaviour
Organisational behaviour is the manifestation of the various forces and
influences operating in the internal environment of an organisation that create
the ability for, or place constraints in the usage of resources. Organisational
behaviour is unique in the sense that it leads to the development of a special
identity and character of an organisation. Some of the important forces and
influences that affect organisational behaviour are: the quality of leadership,
management philosophy, shared values and culture, quality of work environment
and organisational climate, organisational politics, use of power, among others.
The perceptive reader would note that what we are proposing here is a marriage
of the .hard side of an organisation—its resource configuration—with the soft
side of behaviour. The resources and behaviour are thus the yin and yang of
organisations. What they collectively produce are the strengths and weaknesses.
Synergistic Effects
It is the inherent nature of organisations that strengths and weaknesses, like
resources and behaviour, do not exist individually but combine in a variety of
ways. For instance, two strong points in a particular functional area add up to
something more than double the strength. Likewise, two weaknesses acting in
tandem result in more than double the damage. In effect, what we have is a
situation where attributes do not add mathematically but combine to produce an
enhanced or a reduced impact. Such a phenomenon is known as the synergistic
effect. Synergy is the idea that the whole is greater or lesser than the sum of its
parts. It is also expressed as the two-plus-two-is-equal-to-five-or-three effect’.
Within an organisation, synergistic effects occur in a number of ways. For example,
within a functional area, say of marketing, the synergistic effect may occur when the
Organisational Dynamics and Structuring Organisational Appraisal 123
product, pricing, distribution, and promotion aspects support each other, resulting in a
high level of marketing synergy. At a higher level, the marketing and production areas
may support each other leading to operating synergy. On the other hand, marketing
inefficiency reduces production efficiency, the overall impact being negative, in which
case dysergy (or negative synergy) occurs. In this manner, synergistic effects are an
important determinant of the quality and type of the internal environment existing
within an organisation and may lead to the development of competencies.
Competencies
On the basis of its resources and behaviour, an organisation develops certain strengths
and weaknesses which when combined lead to synergistic effects. Such effects manifest
themselves in terms of organisational competencies. Competencies are special qualities
possessed by an organisation that make them withstand pressures of competition in the
marketplace. In other words, the net results of the strategic advantages and
disadvantages that exist for an organisation determine its ability to compete with its
rivals. Other terms frequently used as being synonymous to competencies are unique
resources, core capabilities, invisible assets, embedded knowledge, and so on.
When an organisation develops its competencies over a period of time and hones
them into a fine art of competing with its rivals it tends to use these
competencies exceedingly well. The capability to use the competencies
exceedingly well turns them into core competencies.
When a specific ability is possessed by a particular organisation exclusively, or
in a relatively large measure, it is called a distinctive competence. Many
organisations achieve strategic success by building distinctive competencies
around the CSFs. CSFs are those factors which are crucial for organisational
success. A few examples of distinctive competencies are given below.
Superior product quality in a particular attribute, say, a two-wheeler, which
is more fuel-efficient than its competitor products.
Creation of a market niche by supplying highly-specialised products to a
particular market segment.
Differential advantages, based on the superior R&D skills of an
organisation not possessed by its competitors.
An organisation’s access to a low-cost financial source like equity
shareholders, not available to its competitors.
A distinctive competence is “any advantage a company has over its competitors
because it can do something which they cannot or it can do something better than
they can”. It is not necessary, of course, for all organisations to possess a distinctive
competence. Neither do all the organisations, which possess certain distinctive
competencies, use them for strategic purposes. Nevertheless, the concept of
distinctive competence is useful for the purpose of strategy formulation. The
importance of distinctive competence in strategy formulation rests with “the unique
capability it gives an organisation in capitalising upon a particular opportunity; the
competitive edge it may give a firm in the market place; and the potential for
building a distinctive competence and making it the cornerstone of strategy”.
124 Strategic Management
To some of you, we may seem to be making a hairline distinction here between the three
terms: competencies, core competencies, and distinctive competencies. The difference,
as you must have noted, lies in the degree of uniqueness associated with the net
synergistic effects occurring within an organisation. You could think of them as being
synonymous so long as you are able to make a distinction among them when necessary.
Among the three, it is the term “core competence” that has gained greater currency and
popularity. The term “core competence” has been popularised by Prahalad and Hamel as
an idea around which strategies could be formulated by an organisation.
Several Indian companies have taken to the idea of core competence in right earnest.
Examples abound of companies shedding businesses that are not in line with their
perceived core competencies and focussing upon those that are. Kumar Mangalam
Birla, of the A V Birla group, sees the group’s core competencies in a wide array of
skills related to process industries, project management, operations, raw material
sourcing, distribution and logistics, setting up dealer networks commodity branding,
and raising finance at a competitive cost. S Kumar sees its core competence in
textile processing, Nandas of Escorts in light engineering, and Reli-ance Industries
in skillful project management and execution.
The idea of Core Competence seems to be a brilliant way to focus upon the latent
strength of an organisation. Yet there are pitfalls of which an organisation has to be
aware. Core competencies can be developed but also lost. They cannot be taken for
granted. The ability of a core competence to provide strategic advantage can diminish
over time as they do not exist perpetually. A dilemma associated with all core
competencies is that they have the potential of turning into core rigidities The external
environment is responsible for this sad turn of events. New competitors may figure out a
way to serve customers or new technologies may emerge causing the existing company
to lose its strategic advantage. Over-reliance on core competencies to the extent of
becoming prisoners of one’s own excellence may result in strategic myopia.
That core competence acts as a double-edged sword is demonstrated by the
concept of strategic commitment enunciated by Pankaj Ghemawat. This means
an organisation’s commitment to a particular way of doing business, that is,
developing a particular set of resources and capabilities. Ghemawat’s contention
is that once a company has made a strategic commitment it finds it difficult to
respond to new competition if doing so requires a break with its commitment.
Core or distinctive competencies serve a useful purpose if they are used to develop
sustained strategic advantages through building up organisational capability
Organisational Capability
Organisational capability is the inherent capacity or potential of an organisation to use its
strengths and overcome its weaknesses in order to exploit opportunities and face threats in its
external environment. It is also viewed as a skill for coordinating resources and putting them
to productive use. Without capability, resources, even though valuable and unique, may be
worthless. Since organisational capability is the capacity or potential of an organisation, it
means that it is a measurable attribute. And since it can be measured, it follows that
organisational capability can be compared. Yet it is very difficult to measure organisational
capability as it is, in the ultimate analysis, a subjective attribute. As an attribute, it is the sum
total of resources and behaviour, strengths and weaknesses,
Organisational Dynamics and Structuring Organisational Appraisal 125
Strategic Advantage
Strategic advantages are the outcome of organisational capabilities. They are the
result of organisational activities leading to rewards in terms of financial
parameters, such as, profit or shareholder value, and/or non-financial parameters,
such as, market share or reputation. In contrast, strategic disadvantages are penalties
in the form of financial loss or damage to market share. Clearly, such advantages or
disadvantages are the outcome of the presence or absence of organisational
capabilities. Strategic advantages are measurable in absolute terms using the
parameters in which they are expressed. So, profitability could be used to measure
strategic advantage—the higher the profitability the better the strategic advantage.
They are comparable in terms of the historical performance of an organisation or its
current performance with respect to its competitors.
Competitive advantage is a special case of strategic advantage where there are one or
more identified rivals against whom rewards or penalties could be measured. So,
outperforming rivals in profitability or market standing could be a competitive
advantage for an organisation. Competitive advantage is relative rather than absolute,
and it is to be measured and compared with respect to other rivals in an industry.
With rising competitiveness in the industry, mainly owing to liberalisation and the reform
process, the usage of the term “competitive advantage” has become more pronounced. The
term “competitive advantage” is more popular since it has been used as an important concept
by the proponents of the positioning school of thought in strategy.
techniques. For instance, Glueck proposes a preparation of the strategic advantage profile
(SAP) where the results of organisational appraisal are presented in a summarised form.
Another approach, suggested by Rowe et al., is to prepare a company capability profile as a
means for assessing a company’s strengths arid weakness in dealing with the opportunities
and threats in the external environment. Here we propose a similar approach of making an
organisational capability profile which can be summarised in the form of a SAP. The SAP is
then matched with the environmental threats and opportunity profile, which may have been
prepared while structuring the environmental appraisal, in order to look for strategic
alternatives and exercise a strategic choice.
identify the gaps that need to be filled or the opportunities that could be used.
The preparation of an OCP provides a convenient method to determine the
relative priorities of an organisation vis-a-vis its competitors, its vulnerability to
outside influences, the factors that support or pose a threat to its existence, and
its over all capability to compete in a given industry.
Note: Up arrow indicates strength, down arrow indicates weakness, while horizontal arrow indicates
a neutral position.
The SAP presented in Exhibit 7.3 clearly shows the strengths and weaknesses in
different functional areas. For instance, the company has to use its strengths in the area
of operations and in general management areas. A gap is also indicated in the finance
area which has to be overcome if the company has to survive and prosper in a
competitive industry like bicycle manufacturing. In marketing, though the competitive
position is secure at present, it cannot be said that it will remain so in the future. The
SAP indicates that strategists can initiate action to cover the gaps and use the company’s
strengths in the light of environmental threats and opportunities.
The probable line of action to be adopted for covering the gaps and using the
company’s strengths in the light of environmental threats and opportunities is
found through considering strategic alternatives at the corporate-level and the
business level and exercising a strategic choice.
128 Strategic Management
Organisational Appraisal
The analysis of internal resources has five objectives.
To outline the role that a company’s resources and capabilities play in the
formulation of its strategy and to pinpoint their crucial importance in
establishing competitive advantage.
To show how the firm can identify, classify, and explore the characteristics of its
base of resources and capabilities.
To develop a set of criteria to analyse the potential of the firm’s resources and
capabilities to yield long-term profits/returns.
To identify weaknesses in resources in the context of the external environment and
strategy formulated, and to show how strategy is concerned not only with
deploying the firm’s resources to yield returns over the long term but also with
augmenting and strengthening the firm’s resources and capabilities.
To develop a framework for resource analysis that integrates the above themes
into a practical guide for the formulation of strategies that build
competitive advantage.
and capabilities, may be a much more stable basis on which to define its
identity.
Thus the basis of a resource-based approach to strategy is a definition of
the firm, not in terms of the needs it is seeking to satisfy, but in terms of its
capabilities. The primary issue for strategy is determining what the firm
can do. The second is deciding in which industries and through which types
of competitive strategy the firm can best exploit those capabilities.
Evidently this approach is in contrast to that, proposed by Theodore Levitt 1 in his
classic article ‘Marketing Myopia’ in which he has proposed broadening the
concept of the market served as the key to successful adjustment. Experience
shows, however, that companies basing their strategies on the development and
application of specific capabilities have usually shown a remarkable capacity to
adjust to external changes. Companies like Honda or 3M are cases in point.
The second reason for focusing upon resources as the foundation for an enterprise’s
strategy is that profits are ultimately a return to the resources owned and controlled
by the firm. Profits are usually derived from two sources: the attractiveness of the
industry in which the firm is located, and the achievement of competitive
advantage over other firms wiihin the industry. If, however, we probe deeper into
both competitive advantage and industry attractiveness, we can trace the origins of
both sources of profit back to the firm’s resources.
Let us, therefore, consider competitive advantage. The ability to establish a cost
advantage over competition rests upon the possession of scale-efficient plant,
superior process technology, ownership of low cost sources of raw materials, or
locational advantages in relation to low wage labour or proximity to markets.
Differentiation advantage is similarly based upon ownership or control over certain
resources, brand names, patents, or a wide distribution and service network. llence
the superior profits that a firm gains as a result of competitive advantage over rivals
are really returns generated by these resources. Once these resources depreciate,
become obsolete, or are replicated by other firms, returns also disappear.
Superior profits associated with attractive industry environments are typically thought of as
accruing to the industry rather than to individual firms. Profitability above the competitive
level is typically the result of market power. But what is the source of market power?
Contemporary industrial economists regard barriers to entry as its fundamental prerequisite.
Barriers to entry have one major basis in economies of scale, in capital equipment, patents,
experience, brand loyalty, or some other resource that incumbent firms possess but which
entrants can acquire only slowly or at disproportionate expense. In Exhibit 7.4 graphically
detail, resources as the basis of superior profitability.
Thus the case for resource analysis rests not only upon the observation that
contemporary developments in strategy have overemphasised external analysis
to the near exclusion of internal analysis, but also that resources are the fount
from which a firm’s profits flow. We provide below the outlines of a resource-
based approach to strategy formulations. This comprises three key elements:
130 Strategic Management
Exhibit7.4:ResourcesastheBasisofSuperiorProfitability
Selecting a strategy that exploits a company’s principal resources and
competencies. Successful examples are: IBM and Marks & Spencer (who
concentrated on their core competencies of manufacture and software
development in the first case and marketing in the second). Failures (the
strategies going beyond close linkage with their resource base) are
Chrysier which over-extended itself and ITT whose concentration on
conglomerate development depended solely on the capability of its CEO
(who created no successor) during the seventies.
Ensuring that the firm’s resources are fully employed and its profit potential is
exploited to the utmost. Walt Disney’s remarkable turnaround between 1984
and 1987 (after four successive years of declining net income and other
declining financial indicators) involved very little change in basic strategies.
Building the company’s resource base: Resource analysis is not just about
deploying assets, it is crucially concerned with filling current resource
gaps and building the company’s future resource base. The continuing
dominance of IBM&Proctor and Gamble in their respective fields of
business owes much to these companies’ commitment to nurturing talent,
augmenting technologies, and adjusting capabilities to fit emerging market
trends. This is also evident in the deliberate build up of core competencies
in successful companies like NEC, Canon, Honda, 3M.
Tangible Resources
Tangible resources are the easiest to identify and to evaluate: financial resources
and physical assets are identified in the firm’s financial statement. At the same
time, company financial statements are renowned for their propensity to obscure
strategically relevant information and to mis-value assets.
A strategic assessment of tangible resources is directed towards answering two
key questions:
What opportunities exist for economy in the use of finance, inventions, and fixed
assets?
What are the possibilities of employing existing assets more profitably?
The first may involve using fewer tangible resources to support the same level of
business, or using existing resources to support a larger volume of business. The
success of companies that have pursued growth through acquisitions within
mature industries has been due to management’s ability to vigorously prune the
cash and assets needed to support the turnover of acquired businesses.
The returns to a company’s tangible resources can be increased in many ways.
Resources can be utilised more productively, they can be transferred to more
profitable uses within the company, and finally, can be sold to other companies.
The opportunities for breaking up asset-rich, low-profit companies encouraged
many company acquisitions during the eighties.
Competitive advantage
Capabilities
(Organisational routines)
Resources
Tangible Intangible
Exhibit 7.5: The Two Levels of Resource Analysis: Resources and Capabilities
Intangible Resources
Over time, working capital, fixed capital, and other tangible assets are becoming less
important to the firm, both in value and as a basis for competitive advantage. At the
same time, inversely, the value of intangible resources is increasing. However,
intangible resources remain invisible to accountants and auditors. Hence, accounting
evaluation of net worth increasingly bears little or no relationship to the true value of a
firm’s resources. To illustrate, the most valuable assets owned by consumer goods firms
are likely to be their brand names; yet these either receive no valuation in a company’s
balance sheet or are valued only when they are acquired. It is perhaps not surprising that
when Nestle acquired the British chocolate manufacturer Rowntree in 1988, the bid
price exceeded the book value of Rowntree’s assets by over 500 per cent. This is
132 Strategic Management
but an indication of the value of Rowntree’s brand names such as Kitkat and
Quality Street.
To identify and appraise intangible resources, it is useful to distinguish between human
and non-human intangibles. While people are clearly tangible, the resources that they
offer to the firm are their skills, knowledge, reasoning, and decision-making capabilities
which are clearK intangibles. In economists’ terminology, the productive capability of
human beings is refened to as ‘human capital’. Identifying and appraising the slock of
human capital within a firm is complex and difficult. Individual skills and capabilities
can be assessed from their job performance, from their experience, and from their
qualifications. These are, however, only an indication of an individual’s potential, and in
a firm people work together in a way that makes it difficult to directly observe the
contribution of the individual to overall corporate performance. Yet, if a company is to
develop, to adjust to changing environmental conditions, and to exploit new
opportunities, it must have knowledge not only of how its employees perform in their
present and past jobs, but of their repertoire of skills and abilities. Dave Ulrich of the
University of Michigan points to the role of a human resource information system as a
valuable tool for sustaining a company’s competitive advantage.
While intangible resources receive scant recognition from accountants, their value is
being increasingly recognised by the stock market, as evident from the significantly
high ratio of stock prices to book values of successful companies. Indeed, any
evaluation of this ratio in the stock market will show that two types of companies
dominate such a list: those with valuable technical resources (notably
pharmaceutical companies, an industry where patents are particularly effective), and
companies with very strong brand names (especially in nondurable goods).
Hofer has identified five types of resources: financial, physical, human, technological,
and organisational. Exhibit 7.6 illustrates and slightly modifies his classification of
resource types, and points to their principal characteristics and key indicators.
Resource Audit
The strategic capability of the organisation is built largely around those activities that
add value to a product. Other activities are also useful and necessary but they are not the
ones through which the organisation sustains its distinctive production/service values.
In this context, the relative roles of primary and support activities of the organization need to
be appreciated. It will be obvious that resources contributing to the value system of the
organization will be dispersed amongst various primary activities. The role of support
activities would be to marshal them and use them effectively and efficiently. The checklist in
Exhibit 7.7 would provide broad coverage of the resources to be audited.
It will be noticed that within an activity different types of resources are identified:
Physical resources: Physical resource assessment should go way beyond
mere listing. It should indicate the nature of these resources, their age, condition,
capability, location, and, where relevant, specialty.
Human resources: An analysis of human resources must examine a number of relevant
questions. An assessment of the number and types of different skills within the organization
is undoubtedly important. Equally important, however, are questions such as adaptability
(to different external circumstances). There is also the question of
Organisational Dynamics and Structuring Organisational Appraisal 133
oilier inputs.
Exhibit 7.7: A Checklist for Resource Auditing
Financial resources: This would include the sources and uses of money within
the value chain, such as obtaining capital, managing cash, the control of debtors
and creditors, and management of relationships with suppliers of money
(shareholders, bankers, concepts of convertibility, creditworthiness, etc.).
134 Strategic Management
Resource Utilisation
It is evident that an organisation’s resources have practically no value unless
organised into systems, to ensure that they are utilised to produce goods,
products, or services that are valued by the final consumer/user. There are
various ways of measuring resource utilisation; some are mentioned below.
Capacity Fill
It is often a prime measure of efficiency of organisations whose major costs are
overheads. This is particularly important for those industries where the
additional or marginal cost of additional occupancy of unoccupied capacity is
extremely small. Examples would be transport industries and hotels. It may also
be noted that capacity fill often becomes the major criterion for cost
competitiveness of such organisations.
Production Systems
An essential precondition of the ability to assess the efficiency of the production
system of a company is to have a thorough and clear understanding of the various
aspects of a company’s production system, such as job design, layout, and materials
flow. It may be found, for example, that excessive costs have been incurred through
unnecessary handling and transportation of materials during manufacture, or that the
company can take advantage of new operational methods. In other words, job
simplification, job elimination, methods improvement are distinct possibilities.
Instances of the application of these industrial engineering concepts and consequent
improvement in efficiency with corresponding enhancement of cost-competitiveness
are too numerous to require any specific illustration.
Organisational Dynamics and Structuring Organisational Appraisal 135
Efectiveness
A complete understanding of a company’s use of resources also requires an analysis of
the effectiveness with which these resources have been used. The effectiveness of an
organisation can be critically influenced by the ability to get all parts of the value chain
working in harmony—including those key activities that are within the value chains of
suppliers, channels, or customers. This is a key task of management and is largely
concerned with development and sustenance of common attitudes and values amongst
all those in the value chain so that people see the purpose of the products/services in
similar ways and have a common view on which activities are critical to success. It is
really the differences in attitudes and perceptions on these issues which are often the
root causes of misunderstandings. Some of them are now discussed.
Use of People
There are many situations where people may be used ineffectively. For instance,
an engineering design team may be designing for the lowest cost whilst the
organisation is competing on uniqueness of product. Taking the example to a
degree of refinement, there may be misunderstanding on the concept of
uniqueness itself. Thus the design staff may be designing for durability, whereas
the organisation’s perception of the “market choice is reliability.
Use of Capital
An analysis of a company’s long-term funding (capital structure) may provide useful
insights. A company may be foregoing the opportunity of additional long-term funds
(loans or share issues) and, in consequence, facing difficulty in carrying out its
necessary investment programmes. Sometimes the opposite is true, when a company
may be too highly geared for the realities of the markets in which it is operating. Many
companies have found that when ‘ general levels of profitability are low and interest
rates high, the conventional wisdom of gearing to improve profitability is impossible to
achieve. Organisations that have grown by a series of mergers and takeovers are
particularly astute at putting together packages of finance (money and share options)
that are regarded as attractive by shareholders of the organisations being taken over.
Control of Resources
It is not enough to look at resource audit and utilisation; it is necessary to ensure that
resources are controlled properly according to the strategic intent. Otherwise, there
would be situations where good quality resources have been deployed the right way
and used efficiently, but still performance is poor as resources are poorly controlled.
Exhibit 7.9 lists some aspects of resource control.
The ways in which linkages within the value chain and with the value chains of
supplies, channels, or customers are controlled can also be important. Often
financial control systems of an organization tend to discourage such linkages
because they do not fit the compartmentalised concept of resource control. Some
important aspects of resource control are discussed below.
Physical resources Capacity fill Match between production/marketing resources and nature of
Buildings Capacity fill, unit costs. work.
Plant & machinery Job design, layout, materials flow
Financial Profitability, use of working capital Capital structure
Products Damage (e.g. in transit) Match between product and market needs
Costing
This is an area of particular importance and significance for small, fast-growing
organisations and yet this is where they often fail. The management knows what
resources are needed to establish the company in the market and how to deploy these to
good effect. It is, however, unaware of how its method of operation will influence costs
and revenue, and hence the profitability of the company. It is important to emphasize
that costing is a means of resource control, not obstructing resource utilisation. Often, in
organisations, there is confusion between cost effectiveness and cost minimisation.
Whereas cost effectiveness is invariably desirable, cost minimisation may lead to blind
cost pruning, frequently resulting in a downward spiral, leading to a product/service that
is valued less by consumers/buyers/users, creating a fall in demand, a worsening cost
structure, and so on. This is where a proper appreciation of costing as a resource control
measure comes of age.
Quality of Materials
In most industries, the quality of the finished product is highly dependent on the quality
of certain key materials and components that are bought in. Establishing strict quality
control measures on these materials (and components) is there fore essential to ensure
the quality of the final product. In the context of the value chain there are different ways
in which this might be achieved; for instance by establishing rigid quality specifications;
and subsequent inspection of incoming materials, by inspecting the suppliers’quality
control systems or by inspection of incoming materials. The relative
138 Strategic Management
Marketing Outlets
Many manufacturers fail to exert sufficient control over the way in which their
outlets present and sell their products. Retail outlets often sell 5000 to 10,000
different products, including many that directly compete with one another.
Monitoring and controlling the marketing efforts of outlets is important, but often
difficult. Again, different approaches are possible ranging from the ownership of
outlets (i.e. bringing distribution into the organisation’s own value chain), the Bata
shoe store chain in India is an example; appointment of approved dealers; the
provision of customer training; and the use of merchandising teams.
Control of Leakage
Most companies face this problem. Retailers are particularly vulnerable. Organisations
face a real dilemma since the introduction of more stringent controls and checks could
be counterproductive in reducing the ‘value’ of the service in the eyes of consumers.
Control of Intangibles
The company’s ability to control its image through its public relations activities
is one example. The ‘industrial relations’ record can indicate how well ‘team
spirit’ or ‘organisational culture’ are controlled. In some cases, the control of
vital information that may be of commercial benefit to competitors would be
particularly important to monitor.
Financial Analysis
Financial analysis is useful at all stages of resource analysis, and not only as part of
value analysis. For example, the forecasting of the cash requirements of different
activities is an important measure of how well an organization’s resources are
balanced (portfolio analysis). Equally, financial measures such as profitability,
gearing, or liquidity are used to compare the performance of a company with its
competitors as a means of analysing that company’s resource position.
Organisational Dynamics and Structuring Organisational Appraisal 139
The key value activities change over time. Key financial measures to
monitor will change accordingly. Thus, as a new product launch goes through
introduction, growth, and decline, the key measures shift through sales
volume, profit/unit, and cash flow. Exhibit 7.10 provides some financial
ratios in relation to a company’s strategic resources and capabilities.
Financial Ratio Used to Assess
Return on capital Overall measure of
Performance
Cost structure
Sales profitability Sales performance.
Gross margin Direct costs.
Sales expenses 1. Indirect cost
Overheads 2. Value of expenditure
Labour 1. Labour productivity
2. Relation to ‘value’
Materials 1. Purchasing policies
2. Quality of materials
3. Relation to ‘value’
Dividends Power of shareholders
Interest Capital structure
Asset turnover
Fixed assets Capital intensity
Stock 1. Cash tied up
2. Delivery performance
3. Risk of write-offs
Debtors 1. Cash tied up
2. Use of credit
3. Risk of bad debts
-
Creditors Choice of suppliers
Liquidity Short-term risk
Capital structure 1. Long-term risk
(gearing) 2. Using available resources
Comparative Analysis
To adequately comprehend the strategic capability of an organisation, it is useful to
carry out a comparative analysis, with (i) itself in the past to see how the resource basis
has shifted over time, (ii) other competitive organisations, and (tit) industry norms.
Historical Analysis
Historical analysis looks at the deployment of the resources of a business in comparison
with previous years in order to identify any significant changes in the overall levels of
resources.Typically, measures like sales-capital ratio, sales-employees ratio are used, as
well as identification of any significant variations in the proportions of resources
devoted to different activities. Such analysis appears straightforward, but in a tabulated
form often discloses drifts normally not visible. Thus a company, basically in
manufacturing and retailing its own products, finding the retail market relatively
favourable may gradually emphasise on retailing to such a degree as to drift away from
the traditional base of manufacturing. It is only when resource utilisation is compared
across the years that the drift becomes apparent. It is now for the company to reassess
140 Strategic Management
where its major thrust of business should lie in the future. In other words, the
company has gradually redefined the boundaries of its value chain over time.
Portfolio Analysis
Let us consider the market share, market growth rate BCG matrix together with the
concept of the experience curve discussed above. The experience curve underlines the
importance of the relationship between market dominance and profitability. It will be
evident that there is not much sense in market dominance unless the market is in a
growth stage. Evidently, all competitors would be trying to gain in market shares,
142 Strategic Management
Skills Analysis
Organisations must possess the necessary balance of skills needed to run a
business successfully. Companies need the capability to manage their production
and marketing systems as well as control the financial and personnel aspects
properly. There is another aspect to the balance of human resources, namely the
extent to which nbteams contain an adequate balance of personality types to
operate effectively. Some of the common personality types needed within an
effective team are identified in Exhibit 7.12.
Flexibility Analysis
Another important aspect of organisational resources is the extent to which they
are flexible and adaptable. It is also important to assess how far this flexibility is
balanced with the uncertainty faced by the organisation. Since this uncertainty is
wholly concerned with the external environment and disturbances in it,
flexibility has no meaning without an understanding of the uncertainty involved
or apprehended. Thus flexibility involves resources and their utilisation in the
uncertainty of the external environment in the content of the managment strategy
specifically adopted with an end object in view.
Organisational Dynamics and Structuring Organisational Appraisal 143
Inbound logistics: arc the activities concerned with receiving, storing, and
distributing inputs to the product/ service. This includes materials handling,
stock control, transport, etc.
Operations: transform these various inputs into the final product or service. For
example, this would include machining, packaging, assembly, and testing.
Outbound logistics: collect, store, and distribute the product to customers. For
tangible products this could be warehousing, materials handling, and transport.
In case of services, it may be more concerned with arrangements for bringing
customers to the service if it is a fixed location (e.g. sports events).
Marketing and sales: provide the menus whereby customers/users are made
aware of the product/service, etc., and on completion of sales take in hand the
requirements concerned with collection of dues, data registration, etc. In utility
services, the communication networks which help users access a particular
service are often important.
Service: all the activities that enhance or maintain the value of a product/service
such as installation, repair, training, spares, etc.
Each of these groups of primary activities is linked to support activities. These
can be divided into four areas.
Procurement: refers to the process of acquisition of various resource inputs that
go into primary activities (not to resources themselves). As such, it occurs in
many parts of the organisation.
S
Technology development: all value activities have a ‘technology’ even if it is
simply ‘know- how’. The key technologies may be concerned with the product
(e.g. R&D, product design), or with process (e.g. process development), or with
a particular resource (e.g. raw materials improvement).
Human resource management: high quality training and development, recruitment
of the right people, and appropriate reward systems that motivate people.
Firm’s infrastructure: support from senior executives in customer relations,
investment in suitable physical facilities to improve working conditions, and
investment in carefully designed information technology systems.
A Functional Approach
Strategic internal factors are a firm’s basic capabilities, limitations, and
characteristics. Thus Exhibit 7.18 lists typical factors, broken along functional lines,
some of which would be the focus of internal analysis in most business firms. To
develop or revise a strategy, managers would identify the few factors on which
success will most likely depend. These factors are the key strategic factors.
Strategists examine past performance to isolate key internal contributors to favourable
(or unfavourable) results. The same examination and questions can be applied to a firm’s
current situation, with particular emphasis on changes in the importance of key
dimensions over time. Analysis of past trends of sales, costs and profitability is also of
major importance in identifying strategic internal factors. Identification of strategic
factors also requires an external focus. When a strategist isolates key internal factors
through analysis of past and present performance. industry conditions/trends and
comparison with competitors also provide insights. Changing industry conditions can
lead to the need to re-examine internal strengths and weaknesses in the light of newly
emerging determinants of success in the industry. Furthermore, strategic internal factors
are offer chosen for in-depth evaluation because firms are contemplating expansion of
products or markets, diversification, and so forth. Clearly scrutinizing the industry under
consideration and current competitors is a key means of identifying strategic factors if a
firm is evaluating a move into unfamiliar markets.
Contd...
148 Strategic Management
begins to expand, while technological change in product design slows down considerably.
The result is usually more intense competition and promotional or pricing advantages or
differentiation become key internal strengths. Technological changes in process design
become intense as the many competitors seek to provide the product in the most efficient
manner. Where R&D was critical in the development stage, efficient production has now
become crucial to a business’ continued success in the broad market segments.
When product/markets move towards a saturation/ decline stage, strengths and
weaknesses centre on cost advantages, superior supplier or customer relationships, and
financial control. Competitive advantage can exist at this stage, at least temporarily, if a
firm serves gradually shrinking markets that competitors are choosing to leave.
Exhibit 7.19 is rather a simple model of the stages of product/market evolution.
These stages can and do vary. It is, however, important to realize that the relative
importance of various determinants of success differs across the stages of
product/market evolution, and there -fore these must be considered in internal
analysis. Exhibit 7.19 suggests different dimensions that are particularly
deserving of in-depth consideration while developing a company profile. Exhibit
7.20 suggests steps in the development of a company profile.
Routines also fulfill other functions within the firm. They represent the truce
between conflicting interests of different members of the organisation and provide a
means through which management can control the activi-ties of the organisation. In
particular, they establish standards for the smooth functioning of the organization,
notwithstanding the fact that resources (especially people) are so heterogeneous.
The concept of organizational routines offers illuminating insights into the
relationships between resources, capabilities, and comparative advantage.
Economics of Experience
Just as individual skills are acquired through practice over time, so an organisation’s
capabilities are-developed and sustained only through experience. The advantage of an
established firm over a newcomer is primarily with regard to the routines that it has been
perfecting over time.The Boston Consulting Group’s ‘experience curve’ is a naive and
mechanistic representation of this relationship of experience to performance. A much
more insightful and predictably valid understanding is possible through investigating the
characteristics and evolution of underlying routines. This would also explain, for
instance in industries where technological change is rapid, why new firms may possess
an advantage over established firms. They have a potential for faster learning of new
routines because they are less committed to old ones.
152 Strategic Management
Apropriability
In drawing up an inventory of the firm’s resources, an immediate problem is
determination of the boundaries of the firm’s resource base. As we have
indicated earlier, a firm’s balance sheet is a very poor and unreliable source of
information in this connection.
Once we go beyond financial and physical assets, ownership becomes less clear. The
firm can establish property rights in certain intangible assets: patents, copy-rights, and
brand names for example. Typically, however, only a fraction of the firm’s reputation
and knowledge is protected by legally enforceable ownership. The primary basis of a
company’s capabilities is the skills of its employees. The consequences for the firm arc
twofold: first, the employee is mobile between firms so the firm cannot reliably base a
strategy upon the specific skills of individuals; secondly, the employee is in a good
position to ensure that his or her full contribution to the prosperity of the enterprise is
reflected in the salary and benefits received.
Organisational Dynamics and Structuring Organisational Appraisal 153
Exhibit 7.21: Appraising the Profit Earning Capacity of Resources and Capabilities
But the capabilities of firms are located within groups of individuals and supported
by other sources such as reputation, corporate management systems, and the
systems of values that mesh together the employees of departments and companies.
From the point of view of the firm, the key issue is the degree of control which the
firm can exercise and the extent to which the capability can be maintained when
individual employees leave. A firm’s dependence upon skills possessed by key
highly trained and highly mobile emptoyees is particularly important in the case of
professional service companies. An advertising company would be an apt example.
Such issues would also arise in relation to high technology start-up companies that have
been such a conspicuous feature in the evolution of the US electronic industry.
Typically, these companies are founded by technologists and managers who leave large,
established electronic companies in order to develop and exploit ideas and products that
they conceived of when they were with their former employers. The tendency of large,
US technology-based companies to spin off numerous entrepreneurial start-ups (for
instance the Silicon Valley) rather than being a tribute to the dynamism of American
business enterprise, represents a failure of leading US micro-electronic companies to
maintain ownership and control over technologies that they develop internally.
Faced with ambiguity over property rights in key resources, an important strategic issue
for the firm is the means by which it can secure control over such resources and ensure
that it obtains an adequate share of the return from these assets. The issue of the firm’s
control over its resources is clearly critical to the firm’s ability to use its resources as a
secure base for formulation and implemention of strategy. But ambiguity over
ownership and control is also important from another perspective: the firm’s ability
154 Strategic Management
Durability
Some resources are more durable than others and, hence, are a securer basis for
competitive advantage.
Intangible assets vary substantially in durability. Thus while the value of patents is
increasingly being curtailed by technological leapfrogging, consumer brand names show
remarkable durability (brands like Kelloggs and Coca Cola are examples). Corporate
reputation is similarly long enduring (General Electric, Du Pont, IBM are examples).
The reputation of being a well-managed, socially responsible, financially sound
company, producing reliable products and taking good care of its employees and
customers, gives a company credibility and attention in every field of business it enters.
Transferability
The firm’s ability to sustain its competitive advantage over time depends upon the
speed with which rivals can acquire the resources and capabilities needed to imitate
the success of the initiating firm. The primary means of doing so is the hire and
purchase of required inputs. The ability to do so depends upon the transferability of
resources and capabilities. Some resources such as raw materials, components,
machines performing standard operations, and certain types of human resources are
easily transferable and can be purchased readily. Some other resources such as
special types of machinery and costly equipment are not easily transferable. Yet
other resources such as technical knowledge and brand names may be firm-specific
in the sense that their value declines on transfer to another firm. Other resources
such as the reputation of the firm, may he completely firm-specific and although
valuable to the firm itself, may have doubtful value for an intending purchaser.
Organisational Dynamics and Structuring Organisational Appraisal 155
Replicability
The firm-specificity of a resource or routine limits the ability of a firm to acquire it
simply by purchase in the market. The second route by which a firm can acquire a
resource or capability is by creating it itself through investment. Some capabilities can
be easily initiated through replication. If legal barriers exist to replication, as in the case
of patented products, then replication can be more difficult. Probably the least replicable
capabilities are those that are based upon the exercise of highly complex organizational
routines. The complex nature of these routines and the fact that they are based upon tacit
rather than codified knowledge means that diagnosing and recreating them is
exceedingly difficult. Even when codified, it may still be very difficult to imitate a
competitor’s superior performance. Thus McDonald’s success is based upon a highly
sophisticated and detailed operating system that regulates the operations of every
McDonald outlet, from employee behaviour and dress to cleaning procedures to the
placing of pickles on the burger. Yet the system is only one aspect; equally important is
ensuring its implementation through management information, incentives, and controls.
Similar difficulties of imitation have applied to Western firms’ adoption of
successful Japanese industrial practices. Two of the simplest and best known
Japanese manufacturing practices are just-in-time inventory systems and quality
circles. Both are simple ideas that require neither sophisticated knowledge nor
complex operating systems. Indeed, the concept and design originally came from
the US. Yet the successful operation of both requires a degree of cooperation and set
of attitudes that hew American or European firms have been successful in
introducing with the same degree of success as their Japanese counterparts.
Thus 3M Corporation’s approach to the development of new products is
distinctive competences that arc located not in a particular department or unit,
but permeate the whole corporation and are built into the fabric and culture of
the organisation. Moreover, because these routines are broadly based and not
particular to any one product or production technology, they are not as
constraining and/or subject to obsolescence as more specific routines.
analysis is that once a strategy has been formulated based upon a matching of the
firm’s capabilities with opportunities available in the external environment. The
firm must reconsider the implications of the strategy for the firm’s resource
needs. In other words, what resource gaps need to be filled?
Thus General Motor’s strategy for regeneration, automation, and quality
enhancement has placed great emphasis on identifying and filling the resource
deficiencies that its strategy caused. GM’s needs for electronic technology was
the principal stimulus for Us acquisition of Electronic Data Systems. Likewise,
its quest for improved quality encouraged its strategic alliance with Toyota.
These are aspects of core competency, a concept that will be elaborated below.
The implications of the firm’s strategy for its resources are not only in terms of the
emergence of resource gaps. The pursuit of a particular strategy not only utilises a
firm’s resources, but also augments resources through the creation of skills and
knowledge that are the products of experience. In the words of Hiroyaki Itami who
introduced the concept of ‘dynamic resources fit’: ‘Effective strategy in the present
builds invisible assets, and the expanded stock enables the firm to plan its future
strategy to be carried out. And the future strategy must make effective use of the
resources that have been amassed.’ Matsushita’s multinational expansions have
closely followed this principle of parallel and sequential development of strategy
and resources. Arataroh Takahashi explained the strategy:
In every country batteries are a necessity, so they sell well. As long as we bring a
few advanced automated pieces of equipment for the process vital to final
product quality, even unskilled labour can produce good products. As they work
on this rather simple product, the workers get trained, and this increased skill
level then permits us to gradually expand production to items with increasingly
higher technology level, first rmlio. then television.
This dynamic resource fit may also provide a strong basis for a firm’s
diversification. Sequential additions as expertise and knowledge are acquired are
prominent features of Honda’s strategies in extending its product range from
motorcycles to cars, to lawn mowers, and boat engines, as also 3M’s in
expanding from abrasive, to adhesive, to computer disks, video and audio tape,
and a broad range of consumer and producer goods.
Core Competence
Prahlad and Hamel, in impressing the importance of ‘invisible’ resources in global
competition, have introduced the impressive concept of Core Competency. Core
competencies are the collective learning in organisations, especially on how to
coordinate diverse production skills and integrate multiple streams of technologies. The
philosophy behind the concept is simple and can be likened to a tree. The diversified
corporation is a large tree. The trunk and major limbs are core products, the smaller
branches are business units; the leaves, flowers, and fruit are end products. The root
system that provides nourishment, sustenance and stability is the core competency.
It thus involves not only harmonizing streams of technology but is also about the
organization of work and delivery of value. The force of core competency is felt as
decisively in services as in manufacturing. It is also communication, involvement, and a
Organisational Dynamics and Structuring Organisational Appraisal 157
Core Products
The tangible link between identified core competencies and end products is what is
called core products: the physical embodiments of one or more core competences.
Core products are the components or sub-assemblies that actually contribute to the
value of end products. If a company maintains world manufacturing dominance in
core products it reserves the power to shape the evolution of end products.
Thus Canon is reputed to have an 84 per cent world manufacturing share in desktop laser
printer ‘engines’ even though its brand share in the laser printer business is miniscule.
Similarly, Matsushita has a world manufacturing share of about 45 per cent in key VCR
components, far in excess of its brand share of 20 per cent, and a commanding core product
share in compressors worldwide, estimated at 40 per cent, even though its brand share in
both the air-conditioning and refrigerator businesses is quite small.
To sustain leadership in their chosen core competence areas, these companies
seek to /maximize their world manufacturing share in core products. The
manufacture of core products for, a wide variety of external (and internal)
customers yields the revenues and market feed -back that, at least partially,
determine the pace at which core competences can be enhanced and extended.
Strategic Architecture
The fragmentation of core competencies becomes inevitable when a diversified
company’s information system, patterns of communication, career paths, managerial
rewards, and process of strategy development do not transcend SBU lines.
By providing an impetus for learning from alliance and a focus for internal development
efforts, strategic architecture like NEC’s C&C can dramatically reduce the investment
necessary to secure future market leadership. The answers to the following questions
will help us visualize what strategic architecture looks like. How long could we preserve
our competitiveness in the business if we did not control a particular core competency?
How central is this core competence to perceived customer benefits? What future
opportunities would be foreclosed if we were to lose this particular competence?
This strategic architecture provides a logic for product and market
diversification. It should make resource allocation priorities transparent to the
entire organisation. It provides a template for allocation decision by top
management. It helps lower level managers understand the logic of allocation
priorities and disciplines senior management to maintain consistency. In short, it
yields a definition of the company and the market it serves.
158 Strategic Management
Exhibit 7.22: Two Concepts of the Corporation – SBU and Core Competence
SWOT Analysis 159
Chapter 8
SWOT Analysis
In looking at various aspects of the external and internal environment, we have to
look at the strengths and weaknesses of the company and as also, to an extent,
opportunities and threats. We nevertheless, again reemphasize their importance
in the corporate planning process to make the concept much more self contained.
There are several ways to undertake such analysis. One approach is to look at the
corporate identity and view the strengths, weaknesses, opportunities and threats
from there. The second way is to scrutinize all aspects of the company’s
activities and resources, and look at the strengths and shortfalls.
When looking at the corporate identity, it is relatively simple to see that the
allocation of resources, and the orientation of activities in the market place
must maintain a close identification and alignment with the company’s
missions, and consequent statement of objectives. Any contradiction in this
anywhere would be a symptom of weakness.
When looking at the various aspects of the company, it is possible to identify and
analyse these strengths and weaknesses systematically. We provide here a
brief description.
Strengths
A strength is a resource, skill, or other advantage in relation to the competition and the
needs of markets a firm serves or anticipates serving. A strength is a distinctive
competence that affords the firm a comparative advantage in the market place.
Financial resources, image, market leadership and buyer-supplier relations are examples.
Weaknesses
A weakness is a limitation or deficiency in resources, skills, and capabilities that
seriously impedes effective performance. Facilities, financial resources, management
capabilities, marketing skills, and brand image could be sources of weakness.
Strengths and weaknesses can be identified by careful analysis of the firm’s activities.
A few examples follow:
Source of profit
If the bulk of the profit comes from a single product, that in itself is a symptom
of weakness deserving further analysis:
What is its status in the life cycle? What is the status of competition ? What
is the status of industry sale? Product quality? Is the market share currently
enjoyed commensurate with quality, competition, price status? Is there
scope for further growth in sales through product development?
160 Strategic Management
Risks
The analysis of the source of profits invariably exposes the risks looming ahead.
These may be:
For the product, the dangers of obsolescence;
the danger of being priced out because of quality, cost, and backdated technology;
Opportunities
An opportunity is a major favourable situation in the firm’s environment. Key
trends represent one source of opportunity. The identification of a previously
overlooked market segment, changes in competitive or regulatory circumstances,
technological changes, and improved buyer and/or supplier relationships could
represent opportunities for the firm.
Threats
A threat is a major unfavourable situation in the firm’s environment. It is a key
impediment to the firm’s current and/or desired future position. The entrance of a
new competitor, slow market growth, increased bargaining power of key buyers
or suppliers, major technological change, and changing regulations could
represent major threats to the firm’s future success.
Opportunity for one firm could be a strategic threat to another. Thus regulation in India
reserving some product ranges for the small-scale sector would represent an opportunity
for the small-scale industries in that sector and a threat to large industries in it also, the
same factor can be seen as both a potential opportunity and a potential threat. Thus the
entry of Caterpillar through a joint venture with Mitsubishi in the Japanese market was a
threat to Komatsu whose products were then distinctly inferior in quality by comparison.
It was also an opportunity for Komatsu to employ its R&D efforts to match Caterpillar
quality and thus not only confidently face Caterpillar in the domestic market, but also
expand to become a competitor to Caterpillar internationally. This is a classic example of
a ‘threat’ being converted into an ‘opportunity’.
Understanding the key opportunities and threats lacing a firm helps managers
identify realistic options from which to choose an appropriate strategy. Such
understanding clarifies the identification of the most effective niche of the firm.
SWOT Analysis 161
SWOT analysis can be used in at least three ways in strategic choice decisions.
The commonest application provides a logical framework guiding systematic
discussions of the business situation, alternative strategies, and, ultimately
choice of strategy. What one manager sees as an opportunity, another may
see as a potential threat. Likewise, a strength to one manager may be a
weakness from another perspective. Different assessments may rellect
underlying power consideration within the organization, as well as
differing factual perspectives. The key point is that systematic SWOT
analysis ranges across all aspects of a firm’s situation, providing thereby a
dynamic and useful framework for choosing a strategy.
In a second application of SWOT analysis, key external opportunities and threats are
systematically compared to internal strengihs and weaknesses in a structured
approach. The objective, is identification of one of four distinct patterns in the
match between the firm’s internal and external situations. These patterns are
represented by the four ceils in Exhibit 8.1. Cell I is the most favourable situation;
the firm faces several environmental opportunities and has numerous strengths
that encourage pursuit of these. This condition suggests growth-oriented strategies
to exploit the favourable match. Cell 4 is the least favourable situation, with the
firm facing major environmental threats from a position of relative weakness.
This condition clearly demands strategies to reduce or redirect involvement in the
products/markets examined using SWOT analysis.
In Cell 2, a firm with key strength faces an unfavourable environment. In this
situation, strategies would use current strength to build long-term opportunities
in other products/ markets—a clear call for diversification. A business in Cell 3
faces impressive market opportunity but is constrained by several initial
weaknesses. A business in this predicament is like the question mark in the BCG
matrix. The focus of strategy for such firms is eliminating internal weaknesses to
more effectively pursue market opportunity.
A major challenge in using SWOT analysis is in identifying the position the business is
actually in. A business that faces major opportunities may likewise face some key
threats in its environment. It may have numerous internal weaknesses but also
have one or two major strengths in relation to key competition. Fortunately, the
value of SWOT analysis does not rest solely on careful placement of a firm in one
particular cell. Rather, it lets the strategist visualise the overall position of the firm
in terms of the products/market conditions for which a strategy is being
considered. Does the SWOT analysis suggest that the firm is dealing from a
position of major strength? Or must a firm overcome numerous weaknesses to
match external and internal conditions? In answering these questions, SWOT
analysts helps resolve one fundamental concern in selecting a strategy: What will
he the principal purpose of the grand strategy? Is it to take advantage of a
strong position or to overcome a weak one? SWOT analysis provides a means of
answering this fundamental question, and this answer becomes an input to one
dimension in a second, more specific, tool for selecting grand strategies; the
grand strategy selection matrix.
The basic idea underlying the matrix is that two variables are of central concern in
the selection process: (a) The principal purpose of the grand strategy and. (b) the
choice of an internal and external emphasis for growth and/or profitability. It is
important to note that even early approaches to strategy selection were based on
matching a concern for internal versus external growth, with a principal desire to
either overcome weakness or maximize strength. The same concerns lead to the
development the grand strategy selection matrix, as shown in Exhibit 8.2.
A firm in quadrant 1 often views itself as overly committed to a particular business with
limited growth opportunities or involving high risks because the company has ‘all its
SWOT Analysis 163
Resource Analysis
Manufacturing Activities
This usually provides considerable cost reduction potentials through making the
process more efficient, reducing wastage and often by streamlining the
manufacturing process, raw materials, the standards set for their purchase, etc.
Rationalisation of Resources
This essentially means matching the resources to the requirements in the most
efficient and cost effective way. It includes sizing up of the manufacturing and
other facilities, relocation of facilities, etc.
164 Strategic Management
d. Financial Resources
The financial resources, particularly the liquid resources that are available and/or can be
commandeered, and their adequacy or otherwise when matched against requirements is
an area of strength or weakness. This should not only be true for existing activities, but
also for activities that may additionally be taken up during the plan period.
e. Corporate Capability
In addition to company mission and motivation, every company has, often for no
easily disceruablc design or reason, a number of areas it is good al and a number at
which it is mediocre or poor. Thus one company may be particularly effective in its
customer service, another may be excellent at physical distribution. It may be
possible for one company to utilise design skills more skilfully than its competitor.
Another may have a particular and unique marketing flair. A company may have the
market reputation to give confidence to and attract share capital for new ventures,
another may have the confidence of institutional financial organisations.
These capabilities are extra strengths, providing clues to the possible future
orientation or activity of the company.
f. Systems
The systems and procedures prevalent in the organization are sources of
efficiency or otherwise, and are consequently areas of strength and weakness
that need to be analysed.
Understanding the key strengths and weaknesses of the firm further aids in
narrowing the choice of alternatives and selecting a strategy. Distinct
competence and critical weakness are identified in relation to key determinants
of success for different market segments. This provides a useful framework for
making the best strategic choice. Simultaneously, identification of major
weaknesses enables specific action plans to be drawn up to rectify them.
Profit
A. Profit objective
B. Improvement target
C. Industry forecast
D. Current operations
Planning Horizon
Exhibit 8.3: Gap Analysis
Line D represents the cumulative impact on profit outcome of the current
operations, which indicates a trend towards oblivion. The reasons for such trend
would be evident if one recalls the points made during the discussions on
internal assessment, including the product life cycle.
Line B represents the improvement target, which can be set on the basis of the
analysis of the company’s strengths and weaknesses. This would bepartially
assisted by a projection of the industry forecast, as reflected in Line C.
The gap between Line A and Line B represents the strategic gap, which must
be filled through proper strategic thinking, usually by the top management.
Usually, it is better to plan for some reserve in excess of Line A, in
apprehension that some of the plans adopted might not succeed up to
expectation and planning exactly up to Line A which would automatically result
in a shortfall, whereas the reserve would act as a cushion.
corporate plan. Thus the third step in the heirarchy of strategies would be
necessary; the one covered under the all embracing name diversification strategy.
Synergy structure: As we have already discussed under corporate capability,
for no obviously discernible reason, companies develop distinct
capabilities in a number of areas: a number of activities. It is useful to
chart this capability profile for a company and bear it in mind when
concidering diversification, so that the capability or competence profile
becomes the basic reference profile of the firm, to be utilised to advantage
whenever possible. Thus the profile may be discussed in terms of:
l general management and finance; l
research and development;
operations:
marketing.
Once a search has uncovered a promising acquisition or a new product, a
measurement of the synergy of the product with the competence of the company is
made as a contributing factor to potential joint profitability. The resulting pattern
may be compared with the competitive profile of a successful competitor in the
firm’s own business. This will indicate whether the pattern of reinforcement will
make any significant contribution to the firm’s competitive position.
Exbhibit8.4:AnalysisofStrategicAlternatives
In the matrix, the current current box (a) is covered under momentum strategy.
Box (c) (current product/new market) is covered under development strategy,
while boxes (b) and (d) are diversification strategies.
The important point is to choose a product which should have the following
essential attributes:
It should match the synergic structure of the company,
It should have a good market and a good market potential,
The product itself should have the potential of being expanded into a viable
product group with consistently expanding growth potential.
It is also important for the new product or product group to have adequate
affinity with existing product orientation. A quick way of checking this is by the
Who/ What/How (Y) model shown in Exhibit 8.5
168 Strategic Management
During the gap analysis, the planning team should develop a Who/What/How analysis
for each major product line of business the company is currently dealing in. Thereafter,
for any proposed area of growth in the business plan, the team should compare its who/
what/how model with ones prepared for each of the major areas of the current business/
product range. Comparing with the most similar line of business in the current product
range, it should then attempt to find out how many of the three dimensions would need
to change. Changing only one axis (with whom business is done, or what is sold, or how
business is done) carries with it the least risk. Changing two dimensions at once is
riskier and is, in most cases, imprudent; and a three dimensional switch generally proves
to be al-most foolhardy even if the organisation has massive resources at hand to
simultaneously learn about new customers, new products, and a new delivery system.
Examples of changing only one dimension are innumerable in India among the
successful diversification cases. Ceiling fan manufacturing companies introducing table
or pedestal fans is one such example of single dimensional change. Britannia Biscuits
company manufacturing and marketing cooking oil is an example of simultaneous
change in two dimensions (product, customer). Metal Box making ball bearings and ITC
venturing into marine products are examples of simultaneous change in all three
dimensions and both ended in failure. The first in disaster, the second in heavy loss and
withdrawal. ITC venturing into cooking oils is an example of successful simultaneous
change in three dimensions. It, however, required careful and meticulous preparation.
Essentials
Conversion of long range plans into short range tactical and functional plans;
assignment of tasks to individuals (standards of performance);
budgetary control;
monitoring performance against plan;
monitoring assumptions;
updating and reconsidering the plan as required;
time bound report on planning activity.
Tactical plans: The corporate plan, as it is. cannot be easily implemented
because there are many key actions which are not dclined in detail and
broken down into tasks which can be assigned to particular individuals.
This is usually done by tactical plans, which are usually of two types:
short-term operating plan and project plan.
A short-term operating plan usually covers a year. These are organized around
functional areas, must translate to the immediate future the strategies of the
long term, and should not be used as a means of introducing additional
strategics unless the corporate plan is also modified.
The quality of the annual operating plan would be improved by
careful attention to procedure. A comprehensive timetable should be
issued by the planner, so that every person understands the part he
has to play and the date by which his contribution must be received.
Project plans are meant for specific projects incorporated in the corporate
plan. They have a time span dictated by the implementation time of
the projects themselves. They usually involve many different
functions. The stages in project planning for marketing-oriented
assignments would include:
172 Strategic Management
Stage Action
Identification of idea
l Initial project study Personnel/department to be specified
including desk research depending on
type of project; say new product
introduction—then action is to be taken
by marketing
l Preliminary product marketing Marketing concept
l Definition of Research and R&D
development objective Top management
Decision to proceed
l Refined product marketing concept Marketing assisted by appropriate
department
l Decision to proceed Marketing or top management as
appropriate
l Feasibility study, including market Marketing R&D, Process
research. Process development. Engineering,
further R&D work. Technical R&D, Accounts
feasibility improvement needs, as appropriate
packaging, development,
Revised costing
l Marketing plan and project Marketing, planning/accounting
evaluation
l Decision to proceed Top management
l Completion of test market As appropriate
re-evaluation
l Final decision Top management
Chapter 9
Strategy Formulation
Strategic managers recognize that short-run profit maximization is rarely the best
approach to achieving sustained corporate growth and profitable. An often-
repeated adage states that if impoverished people are given food they will enjoy
eating it but will continue to be impoverished. However, if they are given seeds
and tolls and shown how to grow caps, they will be able to permanently improve
their condition. A parallel situation confronts strategic decision makers:
Should they eat the seeds by planning for large dividend payments, by selling off
inventories, and by cutting back on research and development to improve the near-
term profit picture, or by laying off workers during periods of slack demand?
Or should they sow the seeds by reinvesting profits in growth opportunities, by
committing existing resources to employee training in the hope of
improving performance and reducing turnover, or by increasing advertising
expenditures to further penetrate a market?
For most strategic managers the solution is clear-enjoy a small amount of profit now
to maintain vitality, but sow the majority to increase the likelihood of a long-term
supply. This is the most frequently used rational in selecting objectives.
Profitability
The ability of any business to operate in the long run depends on attaining an
acceptable level of profits. Strategically managed firms characteristically have a
profit objective usually expressed in earning per share or return on equity.
Productivity
Strategic managers constantly try to improve the productivity of their systems.
Companies that can improve the input-output relationship normally increase
profitability. Thus, businesses almost always state an objective for productivity.
Number of items produced or number of services rendered per unit of input are
commonly used. However, productivity objectives are sometimes stated in terms
of desired decreases in cost. This is an equally effective way to increase
profitability if unit output is maintained. For example, objectives may be set for
reducing defective items, customer complaints leading to litigation, or overtime.
Competitive Position
One measure of corporate success is relative dominance in the marketplace. Larger
firms often establish an objective in terms of competitive position to gauge their
176 Strategic Management
comparative ability for growth and profitability. Total sales or market share are often
used; and an objective describing competitive position may indicate a company priorities
in the term. The company mission was described as encompassing the broad aims of
organization. The most specific statement of wants appeared as the goals of the firm.
However, these goals, which commonly dealt with profitability, growth, and survival,
were stated without specific targets or time frames. They were always to be pursued but
could never be fully attained. So, while they gave a general sense of direction, goals
were not intended to provide specific benchmarks for evaluating the company’s progress
in achieving its aims. That is the function of objectives.
Employee Development
Employee value growth and career opportunities in an organization. With such
opportunities, productivity is often increased and expensive turnover decreased.
Therefore, strategic decision makers frequently include an employee
development objective in their long-range plans. For example, PPG has declared
in objective of developing highly skilled and flexible employees, thereby
providing steady employment for a reduced number of workers.
Employee Relations
Companies activity seek good employee relations, whether or not they are bound
by union contracts. In fact, a characteristic concern of strategic managers is
taking proactive steps in anticipation of employee needs and expectations.
Strategic managers believe productivity is partially tied to employee loyalty and
perceived management interest in worker welfare. Therefore, strategic managers
set objectives to improve employee relations. For example, safety programs,
worker representation on management committees, and employee stock option
plans are all normal outgrowths of employee relations objectives.
Technological Leadership
Businesses must decide whether to lead or follow in the marketplace. While
either can be a successful approach, each requires a different strategic posture.
Therefore, many businesses state an objective in terms of technological
leadership. For example, Caterpillar Tractor Company, which manufactures large
earth movers, established its early reputation and dominant position in the
industry in being a forerunner in technological innovation.
Public Responsibility
Businesses recognize their responsibilities to customers and society at large. In fact,
many actively seek to exceed the minimum demands made by government. Not only
do they work to develop reputations for fairly priced products and services, but they
also attempt to establish themselves as responsible corporate citizens. For example,
they may establish objectives for charitable and educational contributions, minority
training, public or political activity, community welfare, and urban renewal.
Perhaps the best answer to these questions is found in relation to seven criteria
that should be used in preparing long-term objectives: acceptable, flexible,
measurable over time, motivating, suitable, understandable, and achievable.
Acceptable
Managers are most likely to pursue objectives that are consistent with perceptions
and preferences. If managers are offended by the objectives (e.g., promoting a non-
nutritional food product) or believe them to be inappropriate or unfair (e.g.,
reducing spoilage to offset a disproportionate fixed overhead allocation), they may
ignore or even obstruct achievement. In addition, certain long-term corporate
objectives are frequently designed to be acceptable to major interest groups external
to the firm. An example might involve air-pollution abatement efforts undertaken at
the insistence of the Environment Protection Agency.
Flexible
Objectives should be modifiable in the event of unforeseen or extraordinary changes in the
firm’s competitive or environmental forecasts. At the same time, flexibility is usually
increased at the expense of specificity. Likewise, employee confidence may be tempered
because adjustment of a flexible objective may affect their job. One recommendation for
providing flexibility while minimizing associated negative effects is to allow for adjustments
in the level rather than the nature of an objective. For example, an objective for a personnel
department “to provide managerial development training for 15 supervisors per year over the
next five-years period” can easily be adjusted by changing the number of people to be
trained. In contrast, changing the personnel department’s objective after three months to
“assisting production supervisors in reducing job-related injuries by 10 percent per year”
would understandably create dissatisfaction.
Measurable
Objectives must clearly and concretely state what will be achieved and within
what time frame. Numerical specificity minimizes misunderstandings; thus,
objectives should be measurable over time. For example, an objective to
“substantially improve our return on investment” would be better stated as “
increase the return on investment on our line of paper products by a minimum of
1 percent a year and a total of 5 percent over the next three years.”
Motivating
Studies have shown that people are most productive when objectives are set at a
motivating level-one high enough to challenge but not so high as to frustrate or so
low as to be easily attained. The problem is that individuals and groups differ in
their perceptions of high enough. A broad objective that challenges one group
frustrates another and minimally interests a third. One valuable recommendation is
to develop multiple objectives, some aimed at specific groups. More sweeping
statements are usually seen as lacking appreciation for individual somewhat unique
situations. Such tailor-made objectives require time and involvement from the
decision maker, but they are more likely to serve as motivational forces.
178 Strategic Management
Suitable
Objectives must be suited to the broad aims of the organization, which are
expressed in the statement of company mission. Each objective should be a step
toward attainment of overall goals. In fact, objectives that do not coincide with
company or corporate missions can subvert the aims of the firm. For example, if
the mission is growth oriented, an objective of reducing the debt-to-equity ratio
to 1.00 to improve stability would probable be unsuitable and counterproductive.
Understandable
Strategic managers at all levels must have a clear understanding of what is to be
achieved. They must also understand the major criteria by which their performance will
be evaluated. Thus, objectives must be stated so that they are understandable to the
recipient as they are to the giver. Consider the potential misunderstandings over an
objective “to increase the productivity of the credit card department by 20 percent within
five years.” Does this mean: Increases the number of cards outstanding? Increase the use
of outstanding cards? Increase the employee workload? Make productivity gains each
year? Or hope that the new computer-assisted system, which should automatically
improve productivity, is approved by year five? As this simple example illustrates,
objectives must be prepared in clear, meaningful, and unambiguous fashion.
Achievable
Finally, objectives must be possible to achieve. This is easier said than done. Turbulence
in the remote and operating environments adds to the dynamic nature of a business’s
internal operations. This creates uncertainly, limiting strategic management’s accuracy in
setting feasible objectives. For example, the wildly fluctuating prime interest rates in
1980 made objective setting extremely difficult for 1981 to 1985, particularly in such
areas a sales projections for consumer durable goods companies like General Motors and
General Electric as shown in Exibit 9.1 in a corporation the primary generator of
strategic alternatives is the top manager, and in a suitable-SBU firm, the primary
generators are the SBU top managers and the corporate top manager. Lower-level
managers are involved to the extent that they prepare proposals for consideration by top
managers. For instance, and R&D unit may propose that additional resources be
allocated for the development of a new product. Top managers need to analyze these
proposals, taking into account strategic considerations that are broader than the merits of
any single project. Functional-level managers are also involved to the extent that plans
to implement strategies are considered as part of the strategy formulation process, and
strengths and weaknesses coming from functional levels are evaluated by these
managers as inputs to the total process.
Whether dealing with corporate-or business- level strategy, there are four generic ways
in which alternatives can be considered: stability, expansion, retrenchment, and
combinations. These are options for the pace or level of effort in the current business
definition, or for changing the mission. Exhibit 9.2 shows a matrix of these basic options
with some representative examples of approaches for carrying out the strategy. That is,
the firm may decide to change its business definition by expanding or retrenching the
scope of its products, markets, or functions. If it chooses to maintain its definition, it still
may alter its strategy by changing the pace of effort within the stable business definition
Strategy Formulation 179
in order to become more efficient or effective in the way it carries out its mission.
Of course, combinations of options are possible at the same time or over time.
Strategists Generate strategy Analyse strategy
alternatives alternatives
SBU-levels managers Regularly Regularly
Top managers Regularly Regularly
Corporate planners Occasionally Regularly
Board of directors Rarely Occasionally
Consultants Occasionally hired to advise Rarely
Functional-level Prepare proposals Regularly
managers
Markets Find new Penetrate Drop Reduce Maintain Protect market Drop old
Territories markets distribution market shares, focus Customers
channels shares on market while finding
niches new ones
Functions Forward Increases Become Decreases Maintain Improve Increases
vertical capacity captive process R&D production capacity and
integration company efficiency Improve
efficiency
Exhibit 9.2: Matrix
For smaller firms, this business definition is simple enough. The product or service,
market, and functions are usually limited to one category or a few categories. This is
true for many medium-sized organizations as well. A majority of large firms are
involved in multiple businesses. So their business definition is more complex.
Some firms are in so many businesses that it is hard if not impossible to describe the
“business” they are in. In one study of three conglomerates (Litton, India Head, and
Bangor Punta) it was found that their strategy making did not involve delineating
specific businesses. Their definition of business involved only the specifications in
detail of the corporate objectives in terms of growth rates, financial policies to guide
their acquisition of funds and firms, and organizational policies.
Decisions regarding business definition and mission are made at the corporate level.
Corporate-level strategies involve issues of which businesses to be in. Business-level
strategies involve questions of what to do with those businesses-expand them, retrench
them, or stabilize them. At the functional level within business units, alternative plans
and policies are set forth to specify ways in which the strategies will be made to work.
Thus corporate-level strategies alternatives revolve around the question of whether to
continue or change the business (es) the enterprise is currently in . Business-level
strategies alternatives involve improving the efficiency or effectiveness with which the
firm achieves its corporate objectives in its chosen business sector.
The central strategies alternatives to consider are the following:
What is our business? What should it be? What business should we be in 5 years
from now? 10 years?
180 Strategic Management
Should we stay in the same business (es) with a similar level of effort? (stability)
Should we get out of this business entirely or some parts of it? (retrenchment)
Should we expand into new business areas by adding new functions, products,
and/or markets? (expansion)
Should we carry out alternatives 3 and 4, 2 and 4, or 2 and 3? Simultaneously or
sequentially? (combination)
Grand Strategies
Despite variations in implementing the strategies management approach, designers of
planning systems generally agree about the critical role of grand strategies. Grand
strategies, which are often called master or business strategies, are intended to provide
basic direction for strategies actions. Thus, they are seen as he basic of coordinated and
sustained efforts directed towards achieving long-term business objectives.
As theoretically and conceptually attractive as the idea of grand strategies has proved to
be, two problems have limited use of this approach in practice. First, decision makers
often do not recognize the range of alternative grand strategies available. Strategic
managers tend to build incrementally from the status quo. This often unnecessarily limits
their search for ways to improve corporate performance. Other executives have simply
never considered the options available as attractive grand strategies.
Second, strategies decision makers may generate lists of promising grand strategies
but lack a logical and systematic approach to selecting an alternative. Few planning
experts have attempted to proffer viable evaluative criteria and selection tools.
The purpose of this section is therefore twofold: (1) to list, describe, and discuss
12 business-level grand strategies that should be considered by strategic planners
and (2) to present approaches to the selection of an optimal grand strategy from
available alternatives.
Grand strategies indicate how long-range objectives will be achieved. Thus, a grand
strategy can be defined as a comprehensive general approach that guides major actions.
Any one of the 12 principal grand strategies could serve as the basis for achieving
major long-term objectives of a single business: concentration, market development,
product development, innovation, horizontal integration, vertical integration, joint
venture, concentric diversification, conglomerate diversification,
retrenchment/turnaround, divestiture, and liquidation. When a company is involved
with multiple industries, businesses, product lines, or customer groups-as many
firms are-several grand strategies are usually combined. However, for clarity, each
of these grand strategies is described independently in this section with examples to
indicate some of their relative strengths and weaknesses.
Concentration
The most common grand strategy is concentration on the current business. The firm
directs its resources to the profitable growth of a single product, in a single market, and
with a single technology. Some of America’s largest and most successful companies
have traditionally adopted the concentration approach. Examples include W. K. Kellogg
and Gerber Foods, which are known for their product; Shaklee, which concentrates on
Strategy Formulation 181
Market Development
Market development commonly ranks second only to concentration as the least costly
and least risky of the 12 grand strategies. It consists of marketing present products, often
with only cosmetic modifications, to customers in related market areas by adding
different channels of distribution or by changing the content of advertising or the
promotional media. Several specific approaches are listed under this heading in Exhibit
9.3 Thus, as suggested by the figure, businesses that open branch offices in new cities,
states, or countries are practicing market development. Likewise, companies that switch
from advertising in trade publications to newspaper or add jobbers to supplement their
mail-order sales efforts are using a market development approach.
Product Development
Product development involves substantial modification of existing products or creation
of new but related items that can be marketed to current customers through established
channels. The product development strategy is often adopted either to prolong the life
cycle of current products or to take advantage of favorable reputation and brand name.
The idea is to attract satisfied customers to new products as a result of their positive
experience with the company’s initial offering. The bottom section of Exhibit 3.3 lists
some of the many specific options available to businesses undertaking product
development. Thus, a revised edition of a college textbook, a new car style, and a second
formula of shampoo for oily hair each represents a product development strategy.
Innovation
In many industries it is increasingly risky not to innovate. Consumer as well as industrial
markets have come to expect periodic changes and improvements in the products
offered. As a result, some businesses find it profitable to base their grand strategy on
innovation. They seek to reap the initially high profits associated with customer
acceptance of a new or greatly improved product. Then, rather than face stiffening
Strategy Formulation 183
Horizontal Integration
When the long-term strategy of a firm is based on growth through the acquisition of
one of more similar businesses operating at the same stage of the production-
marketing chain, its grand strategy is called horizontal integration. Such acquisitions
provide access to new markets for the acquiring firm and eliminate competitors. For
example, Warner-Lambert Pharmaceutical Company’s acquisition of Parke Davis
reduced competition in the ethical drugs field for Chilcott Laboratories, a company
Warner-Lambert had previously acquired. A second example is the long-range
acquisition pattern of White Consolidated Industries, which expanded in the
refrigerator and freezer market through a grand strategy of horizontal integration. In
1967 it acquired the Franklin Appliance Division of Studebaker, in 1978 it bought
the Kelvinator Appliance Division of America Motors, in 1971 it acquired the
Refrigerator Products Division of Bendix Westinghouse Automotive Air Brake, and
finally in 1979 it bought Frigidaire Appliance from General Motors.
184 Strategic Management
60
55
Screening
10 20 30 40 50 60 70 80 90 100
Vertical Integration
When the grand strategy of a firm involves the acquisition of businesses that
either supply the firm with inputs (such as raw materials) or serve as a customer
for the firm’s outputs (such as warehouses for finished products), vertical
integration is involved. For example, if a shirt manufacturer acquires a textile
procedure-by purchasing its common stock, buying its assets, or through an
exchange of ownership interests- the strategy is a vertical integration. In this case
it is a backward vertical integration since the business acquired operates at an
earlier stage of the production/marketing process. If the shirt manufacturer had
merged with a clothing store, it would have been an example of forward vertical
integration-the acquisition of a business nearer to the ultimate consumer.
benefits are achieved with only moderately increased risk, since the success of
the expansion is principle dependent on proven abilities.
The reasons for choosing a vertical integration grand strategy are more varied and
sometimes less obvious. The main reason for backward integration is the desire to
increase the dependability of supply or quality of raw materials or production
inputs. The concern is particularly great when the number of suppliers is small and
the number of competitors is large. In this situation, the vertically integrating firm
can better control its costs and thereby improve the profit margin of the expanded
production/marketing system. Forward integration is a preferred grand strategy if
the advantages of stable production are particularly high. A business can increase
the predictable of demand for its output through forward integration, that is, through
ownership of the next stage of its production/marketing chain.
Some increased risks are associated with both types of integration grand
strategies. For horizontally integrated firms, the risks stem from the increased
commitment to one type of business. For vertically integrated firms, the risks
result from expansion of the company into areas requiring strategic managers to
broaden the base of their competencies and assume additional responsibilities.
Joint Venture
Occasionally two or more capable companies lack a necessary component for success in
a particular competitive environment. For example, no single petroleum firm controlled
sufficient resources to construct the Alaskan pipeline. Nor was any single firm capable
of processing and marketing the volume of oil that would flow through the pipeline. The
solution was a set of joint ventures. As shown in Exhibit 9.6, these cooperative
arrangements could provide both the necessary funds to build the pipeline and the
processing and marketing capacity to profitably handle the oil flow.
The particular form of joint venture discussed above is joint ownership. In recent
years it has become increasingly appealing for domestic firms to join foreign
businesses through this form. For example, Bethlehem Steel acquired an interest in a
Brazilian mining venture to secure a raw material source. The stimulus for this joint
ownership venture was grand strategy, but such is not always the case. Certain
countries virtually mandate that foreign companies entering their markets do so on a
joint ownership basis. India and Mexico are good examples. The rationale of these
countries is that joint ventures minimize the threat of foreign domination and
enhance the skills, employment, growth, and profits of local businesses.
One final note: Strategic managers in the typical firm rarely seek joint ventures.
This approach admittedly presents new opportunities with risks that can be shared.
On the other hand, joint ventures often limit partner discretion, control, and profit
potential while demanding managerial attention and other resources that might
otherwise be directed toward the mainstream activities of the firm. Nevertheless,
increasing nationalism in many foreign markets may require greater consideration of
the joint venture approach if a firm intends to diversify internationally.
186 Strategic Management
Exhibit9.6:Typicaljointventuresintheoilpipelineindustry
Concentric Diversification
Grand strategies involving diversification represent distinctive departures form a firm’s
existing base of operations, typically the acquisition or internal generation (spin-off) of a
separate business with synergistic possibilities counterbalancing the two businesses’
strengths and weaknesses. For example, Head Ski initially sought to diversify into
summer sporting goods and clothing to offset the seasonality of its snow business.
However, diversifications are occasionally undertaken as unrelated investments because
of their otherwise minimal resource demands and high profit potential.
Regardless of the approach taken, the motivations of the acquiring firms are the same:
Increase the firm’s stock value. Often in the past, mergers have led to increases
in the stock price and/or price-earnings ratio.
Increase the growth rate of the firm.
Make an investment that represents better use of funds that plowing them into
internal growth.
Improve the stability of earnings and sales by acquiring firms whose earnings
and sales complement the firm’s peaks and valleys.
Balance or fill out the product line.
Diversify the product line when the life cycle of current products has peaked.
Strategy Formulation 187
Conglomerate Diversification
Occasionally a firm, particularly a very large one, plans to acquire a business because it
represents the most promising investment opportunity available. This type of grand
strategy is commonly known as conglomerate diversification. This principle and often
sole concern of the acquiring firm is the profit pattern of the venture. There is little
concern given to creating product/market synergy with existing businesses, unlike the
approaches taken in concentric diversification. Financial synergy is what is sought by
conglomerate diversifiers such as ITT, Textron, American Brands, Litton, U. S.
Industries, Fuqua, and I. C. Industries. For example, they may seek a balance in their
portfolios between current businesses with cyclical sales and acquired businesses with
counter cyclical sales, between high-cash/low-opportunity and low-cash/high-
opportunity businesses, or between debt-free and highly leveraged businesses.
The principle difference between the two types of diversification is that concentric
acquisitions emphasize some commonly in markets, products, or technology,
whereas conglomerate acquisitions are based principally on profit considerations.
Retrenchment/Turnaround
For any of a large number of reasons a business can find itself with declining
profits. Economic recessions, production inefficiencies, and innovative
breakthroughs by competitors are only three causes. In many cases strategic
managers believe the firm can survive and eventually recover if a concerted
effort is made over a period of a few years to fortify basic distinctive
competencies. This type of grand strategy is known as retrenchment. It is
typically accomplished in one of two ways, employed singly or in combination:
Cost reduction. Examples include decreasing the work through employee
attrition, leasing rather than purchasing equipment, extending the life of
machinery, and eliminating elaborate promotional activities.
Asset reducing. Examples include the sale of land, buildings, and equipment not
essential to the basic activity of the business, and elimination of “perks”
like the company airplane and executive cars.
188 Strategic Management
If the initial approaches fail to achieve the required reductions, more drastic
action may be necessary. It is sometimes essential to lay off employee, drop
items from a production line, and even eliminate low-margin customers.
Since the underlying purpose of retrenchment is to reverse current negative
trends, the method is often referred to as a turnaround strategy. Interestingly, the
turnaround most commonly associated with this approach is in management
positions. In a study of 58 large firms, researches Schendel, Patton, and Riggs
found that turnaround was almost always associated with changes in top
management. Bringing in new managers was believed to introduce needed new
perspectives of the firm’s situation, to raise employee morale, and to facilitate
drastic actions, such as deep budgetary cuts in established programs.
Divestiture
A divestiture strategy involves the sale of a business or a major business component.
When retrenchment fails to accomplish the desired turnaround, strategic managers
often decide to sell the business. However, because the indent is to find a buyer
willing to pay a premium above the value of fixed assets for a going concern, the
term marketing for sale is more appropriate. Prospective buyers must be convinced
that because of their skills and resources, or the synergy with their existing
businesses, they will be able to profit from the acquisition.
The reasons for divestiture vary. Often they arise because of partial mismatches
between the acquired business and the parent corporation. Some of the
mismatched parts cannot be integrated into the corporation’s mainstream and
thus must be spun off. A second reason is corporation financial needs.
Sometimes the cash flow or financial stability of the corporation a whole can be
greatly improved if businesses with high market value can be sacrificed. A third,
less frequent reason for divestiture is government antitrust action when a
corporation is believed to monopolize or unfairly dominate a particular market.
Although examples of grand strategies of divestiture are numerous, an
outstanding example in the last decade is Chrysler Corporation, which in quick
succession divested itself of several major businesses to protect its mission as a
domestic automobile manufacturer. Among major Chrysler sales were its
Airtempat air-conditioning business to Fedders and its automotive subsidiaries in
France, Spain, and England to Peugeot-Citroen. These divestitures yielded
Chrysler a total of almost Rs 500 million in cash, notes, and stock and, rations
that have recently pursued this type of grand strategy include Esmark, which
divested Swift and Company, and White Motors, which divested White Farm.
Liquidation
When the grand strategy is that of liquidation, the business is typically sold in parts, only
occasionally as a whole, but for its tangible asset value and not as a going concern. In
selecting liquidation, owners and strategic managers of a business are admitting failure
and recognize that this action is likely to result in great hardships to themselves and their
employees. For these reasons liquidation is usually seen as the least attractive of all
grand strategies. However, as long-term strategy it minimizes the loss to all stakeholders
of the firm. Usually faced with bankruptcy, the liquidation business tries to
Strategy Formulation 189
develop a planned and orderly system that will result in the greatest possible
return and cash conversion as the business slowly relinquishes its market share.
Combination Strategies
Essentially, combination strategies are a mixture of stability, expansion or
retrenchment strategies applied either simultaneously (at the same time in
different business) or sequentially (at difference times in the same business).
It would be difficult to find any organisation that has survived and grown by
adopting a single ‘pure’ strategy. The complexity of doing business demands that
different strategies be adopted to suit the situational demands made upon the
organisation. An organisation which has followed a stability strategy for quite
some time has to think of expansion. Any organisation which has been on an
expansion path for long has to pause to consolidate its businesses. Multibusiness
organisation-as most large and medium India companies are now-have to follow
multiple strategies either sequentially or simultaneously.
Consider these cases of companies which have adopted multipronged strategies
to deal with the complexity of the environment they face.
The tube Investment of India (TI), a Murugappa group company, has created
strategies alliances in its three major businesses: tubes, cycles, and strips.
In cycles, it has entered into regional outsourcing arrangements with the
UP based Avon (which we could term as co-operation, as Avon is TI’s
competitor in the cycle industry) and Hamilton Cycle in the western
region. In steel strips, TI has entered into a manufacturing contract with
Steel Tubes of India, Steel Authority of India, and the Jindals.
Post-1996, the revival of Peerless General Finance and Investment Company, hinges
on the rationalisation restructurings of its several businesses, like hotels,
housing, hospitals, retailing, and travel, besides its mainline business as the
country’s largest private sector non-banking financial institution. The idea was
to focus on its core competence of financial services. It placed emphasis on
just three or four businesses. Two companies, Peerless Technologies and
Peerless Shipping were divested. Tie-ups with several international companies
to leverage the utilisation of its huge data base and models on the Indian rural
sector was also on the cards.
ITC decide to maintain a corporate portfolio consisting of four businesses:
cigarettes, hotels and tourism, paperboards, and packing and printing. A
turnaround strategy was adopted for the specialty paper business, Triveni
Tissues, while the financial services and agri-business were to be divested.
Pidilite Industries, the maker of Fevicol adhesives, contemplated expansion by
related diversification through extension of its product portfolio across
three business segments: adhesives and sealants, construction paints and
chemicals, and art materials. It divested its specially chemicals business
and acquired M-Seal from the Mahindras.
The examples offer just a glimpse of the constant moves that companies in India
make in order to survive, grow, and be profitable.
190 Strategic Management
Organisations do not depend on the strategy alone and evolve a complex network of
combination strategies to deal with the changing environment. In fact, how to deal
with, and adapt to, environment changes is what strategic management is all about.
Corporate Restructuring
Restructuring is a popular term and is used in different contexts. Let us first try
to quickly understand the various meanings of the term ‘restructuring’ so that we
do not confuse between the different usages of the term. Literature in
management and allied discipline also uses other terms synonymous with
restructuring, such as, revamping, regrouping, rationalisation, or consolidation.
Perhaps the major reason for its popularity is the belief that rapid environmental
change requires expansion. Further, there is a belief and some evidence that
expansion results in performance improvements. However, some suggest that
volatility is not as great as it seems, and other prescribe stability to avoid
overreaction to change. Also, critics of expansion point to firms “engulfed in a
growth syndrome”- expansion at any cost-which they believe leads to
inefficiencies and a lower quality of life due to harm from the environment.
though there can be positive reasons for its use. The retrenchment strategy is the
best strategy for the firm which has tried everything, has made some mistakes,
and is now ready to do something about its problems. The more serious the
crisis, the more serious the retrenchment strategy needs to be. For minor crises,
pace retrenchment will do. For moderate crises, divestiture of some divisions or
units may be necessary. For serious crises, a liquidation may be necessary.
Exhibit 9.6 describes a firm which believes that its crises is serious enough to
warrant a retrenchment in pace, which could lead to liquidation.
The retrenchment strategy is the hardest strategy for the business executives to
follow. It implies that someone or something has failed, and no one wants to be
labeled a failure. But retrenchment can be used to reverse the negative trends and set
the stage for more positive strategic alternatives. Many U. S. business firms began
withdrawing from Europe in the early 1980s due to the stubborn recession, high
labor costs, high taxes, and competition from government-subsidized industries. And
in the mid-1980s many conglomerates began “asset redeployments” to get out of old
businesses and into new ones, or to get back to basics.
Foreign managers appear more willing to consider retrenchment than U. S.
managers. The first question the Japanese, German, or French strategies asks is
likely to be “What are the old things we are going to abandon?” This provides
resources for innovation, new products, or new markets.
BUSINESS
MISSION AND
DEFINITION
COMBINATION
EXPANSION
Markets
Product Functions
STABILITY
RETRENCHMENT
Exhibit9.7:OverlaysofStrategyAlternatives
The latter view of objectives as constrains on strategy formulation rather than as ends
towards which strategies are directed is stressed by several prominent management
experts. They argue that strategic decision are designed (1) to satisfy the minimum
requirements of different company groups, for example, the production department ‘s
need for more inventory capacity, or the marketing department’s need to increase the
sales force and (2) to create synergistic profit potential given these constraints.
Does it matter whether strategic decisions are made to achieve objectives or to
satisfy constraints? No, because constraints are objectives themselves. The
constraints of increased inventory capacity is a desire (an objective), not a
certainty. Likewise, the constraints of a larger sales force does not assure that it
will be achieved given such factors as other company priorities, labor market
conditions, and the firm’s profit performance.
Business-level Strategies
Business strategies are the courses of action adopted by a firm for each of its
businesses separately to serve identified customer groups and provide value to the
customer by a satisfaction of their needs. In the process the firm uses its
competencies to gain, sustain, and enhance its strategic or competitive advantage.
The source of competitive advantage for any business operating in an industry
arises from the skillful use of its core competencies. These competencies are
used to gain a competitive advantage against rivals in an industry. Competitive
advantage results in above-average returns to the company. Business need a set
of strategies to secure competitive advantage.
Michael E Porter is credited with extension pioneering work in the area of business
strategies or, what he calls, competitive strategies. His writing in the form of books,
research papers, and articles have deeply influenced contemporary thinking in the
area of industry analysis, competitive dynamics, and competitive strategies. He is
also considered a major proponent of the positioning school of strategy thought. We
have adopted the approach he approach suggested by him in order to discuss the
different aspects related to business strategies in this chapter.
First of all, let us see what Porter has to say about competition. He believes that
the basic unit of analysis for understanding competition is the industry, which,
according to him, is a group of competitors producing products or services that
compete directly with each other. It is the industry where competitive advantage
is ultimately won or lost. Through competitive strategy, the firms attempt to
define and establish an approach to complete in their industry.
The dynamic factors that determine the choice of a competitive strategy,
according to Porter, are two, namely, the industry structure, and the positioning
of a firm in the industry.
Industry structure, according to Porter, is determined by the competitive forces. These
forces are five in number: the threat of new entrants; the threat of substitute products or
services, the bargaining power of suppliers, the bargaining power of buyers, and the
rivalry among the existing competitors in an industry. We will go into the details of
structural analysis of industries in the next chapter. Suffice it to say here that these five
forces vary industry to industry, that is, every industry has a unique structure and these
factors determine the long-term profitability of firms in an industry.
198 Strategic Management
The second factor that determines the choice of a competitive strategy of a firm is its
positioning within the industry. Porter term’s positioning as the firm’s overall
approach to competing. It is designed to gain sustainable competitive advantage and
is based on two variables: the competitive advantage and the competitive scope.
Competitive advantage can arise due to two factors: lower cost and differentiation.
Competitive scope can be in terms of two factors: lower cost and differentiation.
Competitive scope can be in terms of two factors : broad target and narrow target.
In order to understand competitive positioning, we can visualise a situation in which
a firm has to compete in a market with other rival firms. One type of positioning
approach may be to offer mass-produced products distributed through mass-
marketing thereby resulting in a lower cost per unit. The other type of positioning
approach could be marketing relatively higher- priced products of a limited variety
but intensely focussed on identified customer groups who are willing to pay the
higher price. These are produced through batch production and marketed through
specialised distribution channels. What the firm does is to differentiate its products
or services on some tangible basis from what its rivals have to offer so that the
customer purchases the products even at a premium.
What these approaches show is that there is an overall approach to competing
within an industry which is consciously by a firm. These approaches are termed as
the two generic types of competitive advantages that a firm could plan for: the
lower-cost approach and the differentiation approach. According to Porter, lower-
cost is based on the competence of a firm to design, produce, and market a
comparable product more efficiently than its competitors. Differentiation is the
competence of the firm to provide unique and superior value to the buyer in terms of
product quality, special features, or after-sales service.
Apart from competitive advantage, the other factor is the competitive scope
which Porter defines as the breadth of a firm’s target within its industry. By the
breadth of a firm’s target is meant the range of products, distribution channels,
types of buyers, the geographic areas served, and the array of related industries
in which the firm would also compete. The basic reason why competitive scope
is important is that industries are segmented, have differing needs, and require
different sets of competencies and strategies to satisfy the needs of customers.
In order to understand competitive scope, once again one could visualise a firm
competing in a market with other rival firms. Here the firm can choose a range of
products to offer, the customers groups to cater to, the distribution channels to employ,
and the geographical areas to serve. Depending on the scale of a firm’s operations, we
could say that the firm can either adopt a broad-target approach or a narrow-target
approach. Under broad targeting, the firm can offer a full range of products/services to a
wide range of customer groups located in a widely-scattered geographical area. Under
narrow targeting, the firm can choose to offer a limited range of products/ services to a
few customer groups in a restricted geographical area.
When the two factors of positioning-the competitive advantage and competitive
scope-are combined, what results is a set of generic competitive strategies. These
are what are known as the business-level strategies.
Strategy Formulation 199
Timing Tactics
When to make a business strategy move is often as important as what move to
make. It is here that the timing of the application of a business strategy becomes
important. A business strategy of low-cost of differentiation may be essentially a
right move but only if it is made at the right time.
The recognition of time as a strategic weapon and a source of strategic advantage
came about in the late-1980s as a result of the ideas proposed by George Stalk Jr.,
the head of innovation and marketing at the Boston Consulting Group.
The first company to manufacture and sell a new product or service is called the pioneer
or the first-mover firm. The firms which enter the industry subsequently are late-mover
firms. Sometimes an intermediate category of second-movers is also considered to
include those firms which reach immediately to the first-movers. Each industry has its
first-movers, second-movers and late-movers. Our discussion here will, however, be
limited to the first-movers and the late-movers. Our discussion here will, however, be
limited to the first-movers and the late-movers only, as second-movers, howsoever quick
they might be to react, are in any case late-movers.
Consider the example of Parle which is the first mover in the mineral water industry in
India which has attracted companies, such as, Coca Cole (with the Kinley brand) and
Pepsi (with the Aquafina brand). Parle has dominated a major share of the mineral water
market leading to its Bisleri brand becoming generic to the product category. A case of a
late-mover in this industry is nestle which planned to introduce its brand Pure Life by
the end of 2000. Likewise, in the mutual funds industry, Unit trust of India (UTI), set up
in 1964, is the first-mover with a clear lead of several years over other mutual funds in
the public and private sectors. IIM Ahmedabad is the first-mover in the autonomous
institutions segment in the management education industry.
Being the first mover does not always constitute an advantage. UTI might be the
first-mover but there are many number of late-movers, such as, the Kotak
Mahindra group, which have posed a stiff challenge to it. Similarly, the Indian
School of Business at Hyderabad is likely to challenge the dominant position of
the IIMs. Late-movers such as ICICI-Prudential Life Insurance, HDFC Standard
Life Insurance, and Max New Life Insurance are likely to make life difficult for
the first-mover Life Insurance Corporation (LIC) of India.
There are advantages and disadvantages associated with being the first-mover or
late-mover. Often the advantages of one type are the disadvantages for the other.
This means that the advantages enjoyed by the late-movers can be disadvantages
for the first-mover firms.
200 Strategic Management
First let us see the advantages that might accrue to the first-mover firms.
They can establish a position as the market leaders. They can establish business models
and gain valuable experiences that can enable them to reap the benefits of a
learning curve that can help them in assuming cost leadership.
Moving first in an industry results in forming early commitments to suppliers of
raw materials, new technology, and distribution channels creating cost
advantages over late-movers.
They develop an image of being pioneers which helps to build image and
reputation. First-movers create standards in different areas for all
subsequent products and services in the industry.
Moving first constitutes a pre-emptive strike and creates lead for the first-
movers. For the late-movers, imitation may be difficult and risky.
First-time customers are likely to remain loyal.
The disadvantages of being a first mover are listed below. Note that these
may be the advantages for the late-movers.
Being a pioneer is often costlier than being a follower. Pioneering firms have to
spend resources on creating customer awareness and education regarding
the products, specially if these are new products. Late-movers face lesser
risks when the markets are already developed.
Late-movers can imitate technological advances, skills, know-how and marketing
approaches easily negating the advantages that first-movers are likely to have.
Technological change is often rapid creating obsolescence for the first-movers.
Late-movers can jump the technological thresholds and use the latest
technology available.
Customer loyalty is not guaranteed and can often prove to be ephemeral. Late-
movers can snatch the market share from the first-mover. If the first-
movers have to retain market share and customer loyalty then additional
efforts have to be put in.
The advantages and disadvantages for a first-mover show that good timing is
important. But advantages cannot just flow to the first-movers. In case conditions
are conducive to being a first-mover, then what matters are the strategies,
positioning, and entry barriers that the first-mover firm is able to create. It is not
always that a firm has to be a first-mover even if it has the opportunity. Smart late-
movers can overturn the apple-cart and beat the first-movers at their own game.
Sometimes fence-sitting till some other firm has tested the waters in an industry may
be a prudent business strategy than jumping straight away in order to be the first-
mover. Late-movers can succeed if they have the staying power, can learn from the
mistakes of the first movers and fine tune their business tactics accordingly.
at while applying its business strategies. Every industry has a number of rims that offer
the same or substitute products or services. The total market share in an industry is
carved up by these firms. One firm has the largest market share, some others firms have
a relatively larger market share, a few others have a small market share, and there are
firms that operate only on the fringes and not in the mainstream markets.
Market location could be classified according to the role that firms play in the
target market and the types of business tactics they adopt to play such a role. We
have adopted the classification of market location tactics provided by the
marketing guru, Philip Kotler. He terms these tactics as competitive strategies.
We except that you have studied thee strategies in your marketing management
courses and so we will only, review them here. It would be helpful if you review
your marketing text as you read further.
On the basis of the role that firms play in the target market, market location
tactics could be of four types: leader, challenger, follower, and nichers. As
you will note, the essence of these tactics has been derived from military
science. This is understandable since the competitive industries are virtual
battlefields for competing firms. At this point let us recall that the term strategy
too is a gift to management studies from military science. A brief description of
the four types of market location tactics follow below.
Market leaders are firms that have the largest market share in the relevant product
market and usually lead the industry in factors, such as, technological
developments, product and service attributes, price benchmarks, or
distribution channel design. In order to take up the market leader position and
to retain it, Kotler proposes these three strategies (we would prefer to call
these ‘approaches’ to distinguish these from ‘strategy’ which has a much
broader meaning for us in business policy and strategic management):
l Expanding the total market through new users, new uses, and more usage
l Defending the market share through position defense, flank defense,
counteroffensive defense, mobile defense and contraction defense
l Expanding the market share through the enhancement of operational
effectiveness by means of new product development, raising
manufacturing efficiency, improving product quality, providing
superior support services, or increasing marketing expenditure.
Market challengers are firms that have the second, third or lower ranking in the
industry. These firms can either challenge the market leaders or choose to
follow them. When they seek to challenge the market leader they do so in the
hope that they would be able to gain the market share. The tactics adopted by
the market challenger have several components. First, the challenger has to
define the objective and the opponents, choose a general attack strategy, and
then choose a specific attack strategy. The most common objective of the
challenger it to increase the market share, but it could also have a somewhat
devious aim, say to drive the opponent out of the industry. A general attach
strategy could be of five types:
l Frontal attach involving matching the opponent in terms of the product,
price, promotion, and distribution
202 Strategic Management
Creating niches involves looking for ways and means by which niches
can be identified or created in an industry.
Expanding niches involves enhancing the coverage of the present niche
to include similar market niches or new niches.
Protecting niches involves shielding the niches served from attacks by
other firms in the industry.
204 Strategic Management
Chapter 10
Strategy Analysis and Choice
Strategies analysis and choice largely involves making subjective decisions based on
objective information. The chapter introduces important concepts that can help strategists
generate feasible alternatives, evaluate those alternatives, and choose a specific course of
action. Behavioral aspects of strategy formulation are described, including politics, culture,
ethics, and social reasonability considerations. Modern tools for formulating strategies are
described, and the appropriate role of a board of directors is discussed.
As indicated by the shaded portion of Exhibit 10.1 this section focuses on establishing
long-term objectives, generating alternative strategies, and selecting strategies to pursue.
Strategy analysis and choice seeks to determine alternative course of action that could
best enable the firm to achieve its mission and objectives. The firm’s present strategies,
objectives, and mission, coupled with the external and internal audit information,
provide a basis for generating and evaluating feasible alternative strategies.
Unless a desperate situation faces the firm, alternative strategies will likely represent
incremental steps to move the firm from its present position to a desired future
position. For example, Kindercare Learning Centers has a strategy to open one
hundred new centers this year, thus expanding from current markets into new areas.
Alternative strategies do not come out of the wild blue yonder; they are derived from
the firm’s mission, objectives, external audit, and internal audit; they are consistent
with, or build upon, past strategies that have worked well!
Identity
Revise the Measure and
current business Allocate evaluate
mission,
mission resources performance
objectives,
and
strategies
Perform internal
Select Devise
audit to identify
key strengths and strategies policies
weaknesses to pursue
STRATEGY STRATEGY
STRATEGY
FORMULATION IMPLEMENTATION EVALUATION
Managing by Objectives
An unknown educator once said, ‘If you think education is expensive, try ignorance.”
The idea behind this saying also applies to establishing objectives. Strategies should
avoid the following alternative ways to “not managing by objectives:”
Managing by Extrapolation-adheres to the principle “If it ain’t broke, don’t fix
it.” The idea is to keep on doing about the same things in the same ways,
because things are going well.
Managing by Crisis-based on the belief that the true measure of a really good
strategist is the ability to solve problems. Since there are plenty of crises
and problems to go around for every person and every organization,
strategists ought to bring their time and creative energy to bear on solving
the most pressing problems of the day. Managing by crisis is actually a
form of reacting rather than acting and of letting events dictate the whats
and whens of management decisions.
Managing by Subjectives-built on the idea that there is no general plan for which way to
go and what to do, just do the best you can to accomplish what you think
Strategy Analysis and Choice 207
should be done. In short, “do you own thing, the best way you know how,”
(sometimes referred to as “the mystery approach to decision making”
because subordinates are left to figure out what is happening and why).
Managing by Hope-based on the fact that the future is laden with great
uncertainty and that if we try and do not succeed, then we hope our second
(or third) attempt will succeed. Decisions are predicted on the hope that
they will work and that good times are just around the corner, especially if
luck ad good fortune are on our side.
Important strategy-formulation techniques can be integrated into a three-stage
decision-making framework, as shown in Exhibit 10. 3. The tools presented in
this framework are applicable to all sizes and types of organizations and can
help strategists identify, evaluate, and select strategies.
Stage 1 of the formulation framework consists of the EFE Matrix, Competitive Profile
matrix, and the IFE Matrix. Called the Input stage, Stage 1 summarizes the basic input
information needed to formulate strategies. Stage 2, called the Mathcing Stage, focuses
upon generating feasible alternative strategies by aligning key external and internal
factors. Stage 2 techniques include the Threats-Opportunities-Weaknesses-Strengths
(TOWS) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the
Grand Strategy Matrix. Stage 3, called the Decision Stage, involves a single technique,
the Quantitative Strategies Planning Matrix (QSPM). A QSPM uses input information
derived from Stage 1 to objectively evaluate feasible alternative strategies identified in
Stage 2. A QSPM reveals the relative attractiveness of alternative strategies and thus
provides an objective basis for selecting specific strategies.
All nine techniques included in the strategy-formulation framework require
integration of intuition and analysis. Autonomous divisions in an organization
commonly use strategy-formulation techniques to develop strategies and
objectives. Divisional analyses provide a basis for identifying, evaluating, and
selecting among alternative corporate-level strategies.
STAGE 1 : THE INPUT STAGE
External Factor Competitive Internal Factor
Quantitative strategic
Planning Matrix
(QSPM)
Excess working capital + 40% annual growth of the = Acquire Aerospace, Inc.
(an internal strength) aerospace industry (an
external opportunity)
Insufficient capacity (an + Exit of two major foreign = Pursue horizontal
internal weakness) competitions from the integration by buying
industry (an external competitors’ facilities
opportunity)
Strong R & D expertise + Decreasing number of = Develop new products for
(an internal strength) young adults (an external older adults
threat)
Poor employee morale (an + Strong union activity (an = Develop a new
internal weakness) external threat) employee-benefits
package
four strategy cells, and one cell that is always left blank (the upper left cell). The
four strategy cells, labeled SO, WO, ST, and WT, are developed after completing
four key factor cells, labeled S, W, O, and T. There are eight steps involved in
constructing a TOWS Matrix:
STRENGTHS-S WEAKNESSES-W
1. 1.
2. 2.
3. 3.
4. 4.
Always leave blank 5. 5.
6. List 6. List
7. strengths 7. weaknesses
8. 8.
9. 9.
10. 10.
1. OPPORTUNITIES-O 1. SO SRATEGIES 1. WO STRATEGIES
2. 2. 2.
3. 3. 3.
4. List 4. Use strengths 4. Overcome
5. opportunities 5. to take 5. weaknesses
6. 6. advantage of 6. by taking
7. 7. opportunities 7. advantage of
8. 8. 8. opportunities
9. 9. 9.
10. 10. 10.
1. STRENGTHS-S 1. ST STRATEGIES 1. WT STRATEGIES
Some other example of SO, WO, ST, and WT Strategies are given as follows:
A strong financial position (internal strength) coupled with unsaturated foreign
markets (external opportunities) could suggest market development to be
an appropriate SO Strategy.
Strategy Analysis and Choice 211
From the above description, it is broadly clear that cash cows generate funds and dogs, if
divested, release funds. On the other hand, stars and question marks require further
commitment of funds. Hence, the suggested pattern of resource allocation should be as
shown in Part A of Exhibit 10.6 Conscious efforts should be made to avoid the pattern of
resource allocation depicted in Part B of Exhibit 10.6 some firms unwittingly adopt this
pattern which leads to the neglect of stars and question marks and to the misdirection of
surplus funds generated by cash cows into futile efforts to revive dogs.
Part A
Stars Question marks
Part B
Stars Question maks
Cash cows Dogs
Exhibit10.7:GeneralElectric’sStoplightMatrix
Strategy Analysis and Choice 213
Strategic Postures
The basic strategic postures associated with the SPACE approach, illustrated
graphically in Exhibit 10.9 are as follows:
Aggressive Posture: This is appropriate for a company which (i) enjoys a
competitive advantage and considerable financial strength and (ii) belongs to an
attractive industry that operates in a relatively stable environment. An aggressive posture
means that the firm must fully exploit opportunities available to it, seriously look for a
acquisition possibilities in its own or related industries, concentrate resources to
maintain its competitive edge, and enhance its market share. The aggressive posture is
similar to the generic strategy of overall cost leadership suggested by Michael Porter.
A : Aggressive Posture B : Competitive Posture
FS 7 FS 7
-7 7 -7 7
CA IS CA IS
ES -7 -7
ES
-7 7 -7 7
CA IS CA IS
FS -7 FS -7
Conglomerate Concentration
Diversification FOCUS COST Vertical
LEADERSHIP
Diversification Conservative Aggressive Integration
CA IS
Defensive Competitive
Divestment GAMESM- DIFFEREN - Concentric
ANSHIP TIATION Merger
Liquidation Conglomerate Merger
Retrenchment Turnaround
ES
Exhibit 10.10: Generic Strategies and Key Options
Competitive Posture: This is suitable for a company witch(i) enjoys a
competitive advantage but has limited financial strength, and (ii) belongs to an
attractive industry operating in a relatively unstable environment. The key
planks of the competitive posture are as follows: maintain and enhance
competitive advantage by product improvement and differentiation, widen the
product line, improve marketing effectiveness, and augment financial resources.
There is a great deal of product differentiation suggested by Michael Porter.
Conservation Posture: This is appropriate for a company which(i) enjoys
financial strength but has limited competitive advantage, and(ii) belong to a not-
so-attractive industry operating in a relatively stable environment. A
conservative posture call for the following action: prune non-performing
products, reduce costs, improve productivity, develop new products, and access
more profitable markets. The conservation posture described here is somewhat
similar to the generic strategy of focus suggested by Michael Porter.
Defensive Posture: This is suitable for a company which(i) lacks competitive advantage
as well as financial strength, and(ii) belong to a not- so-attractive industry operating in an
unstable environment. A defensive posture involves the following actions: discontinue
unviable products, control costs aggressively, monitor cash flows strictly, reduce capacity,
and postpone or limit investment. The defensive posture so defined may be likened to
gamesmanship which calls for employing manoeuvres to keep the company afloat, check the
onslaught of competition, and eventually facilitate withdrawal or exit.
The generic strategies and the key options (which have important resource
allocation implications) associated with them are shown in Exhibit 10.10. This is
drawn from the book Strategic Management - A Methodological Approach by A.J.
Rowe, R.O. Mason, and K.E. Dickel (Reading, Massachusetts, Addision-Wesley Publishing
Company, 1986).
216 Strategic Management
Strong Average Weak
1 2 -25%
-50%
3.0
3 4 - 5%
- 20%
2.0
1.0
Finance/Account ng
Production/Operation
success factor. Any number of sets of alternative strategies can be included in the
Research and Development
Information QSPM, and any number of strategies an comprise a given set. But only strategies
systems
External Factors
within a given set are evaluated relative to each other. For example, one set of strategies
Economy may concentric, horizontal, and conglomerate diversification, whereas
Political/Legal/Governmincludet
Technologic al anoth er set may include issuing stock and selling a division to raise needed capital.
Social/Cultural/D m g phic
Competitive These two sets of strategies are totally different, and the QSPM evaluates strategies
only within sets. Note in Exhibit 10.14 that three strategies are included and they comprise
just one set.
Internal Factors : 1 = major weakness; 2 = minor weakness; 3 = minor strength; 4 = major strength
External Factors: 1 = the firm’s response is poor; 2 = the firm’s response is average; 3 = the firm’s
response is above average; 4 = 1 = the firm’s response is superior
A more detailed example of the QSPM is provided in Exhibit 10.15. This example
illustrates all the components of the QSPM: Key Factors, Strategic Alternatives,
Ratings, Attractiveness Scores, Total Attractiveness Scores, and Sum Total
Attractiveness score. The three new terms just introduced -(1) Attractiveness Scores,
(2) Total Attractiveness Scores, and (3) Sum Total Attractiveness Score-are defined
and explained below as the six steps required to develop a QSPM are discussed.
Step 1 List the firm’s key external opportunities/threats and internal strengths/
weaknesses in the left column of the QSPM. This information should be taken
directly from the EFE Matrix and IFE Matrix. A minimum of ten external critical success
factors and ten internal critical success factors should be included in the QSPM.
Step 2 Assign Ratings to each external and internal critical success
factor. These Ratings are identical to those in the EFE Matrix and the IFE
Matrix. The Ratings are presented in a straight column just to the right of the
external and internal critical success factors, as shown in Exhibit 10.15.
Step 3 Examine the State 2 (matching) matrices and identify
alternative strategies that the organization should consider
implementing. Record these strategies in the top row of the QSPM. Group the
strategies into mutually exclusive sets if possible.
Step 4 Determine the Attractiveness Scores, defined as numerical values that
indicate the relative attractiveness of each strategy in a given set of alternatives.
Attractiveness Scores are determined by examining each external or internal critical
success factor, one at a time, and asking the question “Does this factor affect the choice
of the strategies being evaluated?” If the answer to this question is YES, then the
strategies should be compared relative to that key factor. Specifically, Attractiveness
Scores should be assigned to each strategy to indicate the relative attractiveness of one
strategy over others, considering the particular factor. The range for Attractiveness
Scores is 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 =
highly attractive. If the answer to the above question is NO, indicating that the
respective critical success factor has no effect upon the specific choice being made, then
do not assign Attractiveness scores to the strategies in that set.
Note in Exhibit 10.15 that the “outstanding R & D Department” (an internal
strength) has no significant effect upon the choice being made between acquiring
the financial service versus the food company, so “blank” lines are placed in that
row of the QSPM. “Two major foreign competitors are entering the industry” is
a major external threat that results in an Attractiveness score of 1 for “Acquire
Financial Service,” compared to an Attractiveness score of 3 for the “Acquire
Food services” strategy. These scores indicate that acquiring the Financial
Services firm is “not attractive,” whereas acquiring the Food services firm is
“reasonably attractive,” considering this single external critical success factor
and the firm’s current response to that strategy as indicated by the Rating.
Strategy Analysis and Choice 221
Key factors Ratings Acquire Financial Acquire Food Rationale for Attractiveness
Services, Inc Services, Inc Score
AS* TAS* AS* TAS*
Internal Factors 3 4 12 2 6 Fifteen years’ experience is in
Top management team has
fifteen years’ experience. financial services
We have excess working capital 4 2 8 3 12 Food services is valued at $2
of $ 2 million. million.
All of our twenty plants are 1 2 2 4 4 Food Services is located in
located in the the Sunbelt.
Northeast United States.
Our R & D department is 3 - - - - This items does not affect the
outstanding. strategy choice.
Our Return on Investment (ROI) ROI at Food Services is
ratio of. 12 is lowest in the higher than at Financial
industry. Services.
External Factors 2 3 6 4 8 Rising rates will hurt the
Interest rates are expected to rise
to 15 percent in 1990. financial services business
Population of the South is 3 4 12 2 6 Many new houses and
expected to grow by 15.3 million apartments will be built and
between 1992 and 2000. financed.
The financial services industry is 4 4 16 2 8 This 40 percent growth is in
expected to grow by 40 percent financial services.
in 1992.
Two major foreign 1 1 1 3 3 Food Services, Inc. is not
affected by this entry.
President Bush is expected to 2 - - - - This item does not affect the
deregulate the industry. strategy choice.
SUM TOTAL ATTRACTIVENESS SCORE 59 50
Step 5 Compute the Total Attractiveness Scores. Total Attractiveness Scores are
defined as the product of multiplying the Ratings (Step 2) by the Attractiveness Scores (Step
4) in each row. The Total Attractiveness Scores indicate the relative attractiveness of each
alternative strategy, considering only the impact of the adjacent external or internal critical
success factor. Total Attractiveness Scores for each alternative are provided in Exhibit 3.26.
The higher the Total Attractiveness Score, the more attractive the strategic alternative
(considering only the adjacent critical success factor).
Step 6 Compute the Sum Total Attractiveness Score. It is the summation of
the Total Attractiveness Scores in a strategy column of the QSPM. Sum Total
Attractiveness Scores reveal which strategy is most attractive in each set of
alternatives. Higher scores indicate more attractive strategies, considering all the
relevant external and internal factors that could affect the strategic decisions. The
magnitude of the difference between the Sum Total Attractiveness scores in a given
set of strategic alternatives indicates the relative desirability of one strategy over
another. (In the example, the Sum Total Attractiveness Score of 59, compared to 50,
indicates that Financial Services, Inc. should be acquired.)
222 Strategic Management
This study supports the idea that managers make different decisions depending
on their willingness to take risks. Perhaps most important, the study suggests
that being either risk prone or risk averse is not inherently good or bad. Rather,
SBUs performance is more effective when the risk orientation of the general
manager is consistent with the SBU’s strategic mission (build or harvest). While
this is only one study and not final determination of the influence of risk
orientation on the process of making and implementing strategic decisions.
Exhibit10.17:PoliticalActivitiesinPhasesofStrategicDecisionMaking
Timing Considerations
The time element can have considerable influence on strategic choice. Consider the case of
Mech-Tran, a small manufacturer of fiberglass piping that found itself in financial difficulty.
At the same time it was seeking a loan guarantee through the Small Business Administration
(SBA), it was approached by KOCH industries (a Kansas City-based supplier of oil field
suppliers) with a merger offer. The offer involved 100 percent sale of Mech-Tran stock and a
two-week response deadline, while the SBA loan procedure could take three months.
Obviously, management’s strategic decision was heavily influenced by external Wright
indicates that under such a time constraint, managers put greater weight on negative than on
positive information and prefer defensive strategies. The Mech-Tran owners decided to
accept the OCH offer rather than risk losing the opportunity and subsequently being turned
down by the SBA. Thus, faced with time constraints, management opted for a defensive
strategy consistent with Wright’s findings.
There is another side to the time issue – the timing of a strategic decision. A
good strategy may be disastrous if it is undertaken at the wrong time. Winnebago
was the darling of Wall Street in 1970, with its stock rising from Rs. 3 to Rs. 44
per share in one year. Winnebago’s 1972 strategic choice, focusing on increasing
its large, centralized production facility, was a continuation of the strategy that
had successfully differentiated Winnebago in the recreational vehicle industry.
The 1973 Arab oil embargo with subsequent rises in gasoline prices and overall
transportation cots had dismal effects on Winnebago. The strategy was good, but
the timing proved disastrous. On the other hand, IBM’s decision to hold off
entering the rapidly growing personal computer market until 1982 appeared to be
perfectly timed. Welcomed by Apple with a full-page advertisement in The Wall
Street Journal, IBM assumed the market share lead by early 1983.
Strategy Analysis and Choice 227
A final aspect of the time dimension involves the lead time required for alternative
choices and the time horizon management is contemplating. Management’s primary
attention may be on the short or long run, depending on current circumstances.
Logically, strategic choice will be strongly influenced by the match between
management’s current time horizon and the lead time (or payoff time) associated with
different choices. As a move towards vertical integration, Du Pont went heavily into
debt to acquire Conoco in a 1982 bidding war. By 1983, the worldwide oil glut meant
that Du Pont could have bought raw materials on more favourable terms in the open
market. This short-term perspective was not of great concern to Du Pont management,
however, because the acquisition was part of a strategy to stabilize Du Pont’s long-term
position as a producer of numerous petroleum-based products.
Competitive Reaction
In weighing strategic choices, top management frequently incorporates perceptions
of likely competitor reactions to different option. For example, if management
chooses an aggressive strategy that directly challenges a key competitor, that
competitor can be expected to mount an aggressive counterstrategy. Management of
the initiating firm must consider such reactions, the capacity, of the competitor to
react, and the probable impact on the chosen strategy’s success.
The beer industry provides a good illustration. In the early 1970s, Anheuser-Busch
dominated the industry. Miller Brewing Company, recently acquired by Philip
Morris, was a weak and declining competitor. Miller’s management, contemplating
alternatives strategies, made the decision to adopt an expensive, advertising-oriented
strategy. While this strategy challenged the big three (Anheuser-Busch, Pabst, and
Schlitz) head-on, Miller anticipated that the reaction of the other brewers would be
delayed due to Miller’s current declining status in the industry. Miller proved correct
and was able to reverse its trend in market share before Anheuser-Busch countered
with an equally intense advertising strategy.
Miller’s management took another approach in their next major strategic decision.
In the mid-1970s they introduced (and heavily advertised) a low-calorie beer-Miller
Lite. Other industry members had introduced such products without much success.
Miler chose a strategy that did not directly challenge key competitors and, Miller
anticipated, would not elicit immediate and strong counterattacks. This choice
proved highly successful, because Miller was able to establish a dominant share of
the low-calorie market before major competitors decided to react. In both cases,
Miller’s expectation of competitor reaction was key determinant of strategic choice.
Contingency Strategy
Ultimate strategic choices often depend on various assumptions about future conditions.
The success of the strategy chosen is contingent, to varying degrees, on future conditions.
And changes in the industry and environment may differ from forecasts and assumptions.
For example, Winnebago’s strategy of centralized, economy-of-scale production and
extensive inventories of large recreational vehicles (RVs) was contingent on a continued
supply of plentiful, inexpensive gasoline for future customer use. With the Arab oil
embargo, this contingency changed dramatically. Winnebago was left with extensive
inventories of large RVs and high-break-even-oriented production facilities for large
RVs. As a result, Winnebago was still trying to recover a decade later.
228 Strategic Management
trigger points; and developing strategies and tactics. Essentially, the requirements of
the model are to list events that may occur in the future which are critical to a
company’s strategy formulation process. Trigger points are established in the form
of indicators which signal the impending occurrence of these events, after which
strategies or tactics are employed to deal with the changed situation. This matter f
reorienting the current strategies in the light of emerging environmental situations
would be an issue to be discussed in the last phase of strategic management, namely,
strategic evaluation and control. Contingency strategies have received a fair amount
of attention from policy researchers as they are of immense value to strategists who
have to deal with a transient phenomenon like the business environment.
Strategic Plan
A strategic plan (also called a corporate, group, or perspective plan), is a
document which provides information regarding the different elements of
strategic management and the manner in which an organisations and its
strategists propose to put the strategies into action.
A comprehensive strategic plan document could contain the following information:
A clear statement of strategic intent covering the vision, mission, business
definition, goals and objectives.
Results of environmental appraisal, major opportunities and threats, and critical
success factors
Results of organisational appraisal, major strengths and weaknesses, and core
competencies
Strategies chosen and the assumptions under which the strategies would be
relevant. Contingent strategies to be used under different conditions
Strategic budget for the purpose of resource allocation for implementing
strategies and the schedule for implementation
Proposal organisational structure and the major organisational systems for strategy
implementation, including the top functionaries and their role and responsibility
Functional strategies and the mode of their implementation
Measures to be used to evaluate performance and assess the success of strategy
implementation
Typically, a strategic plan document could run into several pages and be treated as a
formal report. Another possibility is that a brief document of three to five pages
could briefly cover the points mentioned above. Much would depend on the nature
and size of the company and the management policies regarding the preparation of
the strategic plan document. It must be remembered, however, that when approved
and accepted, a strategic plan document has to be communicated down the line to
middle-level managers who will be responsible for its implementation.
Most large-size companies in India formulate strategic plans. Medium-sized and small-
scale companies also perform the exercise though not necessarily in a formal and
structured manner. The AIMA commissioned a nationwide study to find out what
230 Strategic Management
management techniques and tools companies are likely to employ. The study was
conducted between April and June 1997. Business Today reported that 56 per
cent of the total 160 companies surveyed had a published business strategy.
Among these, 77 per cent were giant companies, 69 per cent were large, 53 per
cent were medium-sized, and 45 per cent were small companies. The time period
covered in the strategic plan was less than three years for 44 per cent of the
companies; 40 per cent planned for three to five years time horizon, while 16 per
cent did it for a period of more than five years. In terms of company size, 45 per
cent of the giant companies planned for more than five years, while 70 per cent
of the small companies planned for a period of less than three years.
A special feature of strategic plans is that many companies consciously
formulated their plans keeping in view the timeframe adopted for national-level
planning. Thus, companies normally have a five-year planning period which is
synchronized with that of the National Five-Year Plans. In fact, core public
enterprises have to link their corporate plans with the national Five-Year Plans.
Many public sector enterprises such as SAIL, BHEL, HMT and others have
formulated corporate plans of varying duration. SAIL had drawn up an ambitious
15-year corporate plan till 2000AD, while planning at BHEL has taken shape in
the form of the first corporate plan which started in 1974.
Like public sector enterprises, private sector companies too formulate strategic
plans. Multinational company (MNC) subsidiaries often have to prepare and
plan the documents to be submitted to their parent companies for approval.
Often, the MNC subsidiaries draw their strategic plans on the basis of guidelines
provided by their parent institutions. Professional private sector companies may
have executive committees consisting of senior level managers who formulate
strategic plans. Family groups often draft group strategic plans to provide
strategic directions to the different companies in the group.
The formulation of a strategic plan document provides a means not only to formalise the
effort that goes into strategic planning but also for communicating to insiders and outsiders
what the company stands for, and what it plans to do in a given future time period. A
strategic plan is not always publicised. Rather, companies prefer to treat is as confidential,
primarily for protecting their competitive interests. But the main features of the plan are
often spelt out for communication to outsiders and for public relations purposes.
Strategy Implementation – Aspects, Structures, Design and Change 231
Chapter 11
Strategy Implementation – Aspects, Structures,
Design and Change
The task of strategic management is far from complete after strategies have been
formulated and a concrete strategies plan has been prepared. Then it is the job of
strategists to put the plan into action. It is important to consider the interrelationship
between the formulation and implementation of strategies. It is to be noted that the
division of strategic management into different phases is only for the purpose of orderly
study. In real life, the formulation and implementation processes are intertwined. Two
types of linkages exist between these two phases of strategic management. The forward
linkages deal with the impact of the formulation on implementation while the backward
linkages are concerned with the impact in the opposite direction.
Forward Linkages
The different elements in strategy starting with the various constituents of strategic
intent through environmental and organisational appraisal, strategic alternatives,
strategic analysis and choice and ending with the strategic plan, determine the course
that an organisation adopts for itself. With the formulation of new strategies, or
reformulation leading to modified strategies, many changes have to be effected
within the organisation. For instance, the organisational structure has to undergo a
change in light of the requirements of a modified or new strategy. The style of
leadership has to be adapted to the formulation of strategies. A whole lot of changes
have to be undertaken in operationalising the formulated strategies. Clearly, the
strategies formulated provide the direction to implementation. In this way, the
formulation of strategies has forward linkages with their implementation.
Backward Linkages
Just as implementation is determined by the formulation of strategies, the formulation
process is also affected by factors related with implementation. Recall that in the
previous chapter, while dealing with strategic choice we observed that past strategic
actions also determine the choice of strategy. Organisations tend to adopt those strategies
which can be implemented with the help of the present structure of resources combined
with some additional efforts. Such incremental changes, over a period of time, take the
organisation from where it is to where it wishes to be.
It is to be noted that while strategy formulation is primarily an entrepreneurial
activity, based on strategic decision-making, the implementation of strategy is
mainly an administrative task based on strategic as well as operational decision-
making. Looked at from another angle, formulation is a managerial task requiring
analysis and thinking, implementation primarily rests on action and doing. The next
section focuses on the various issues involved in the implementation of strategies.
232 Strategic Management
Strategies
Plans
Programmes
Projects
Budgets
---------------------------------------------
Policies, procedures, rules and regulations
Perform
externnal Establish Establish
audit to long-term annual
idenityfy key objectives objectives
opportunities
and threats
Identitify
Revise the Allocate Measure and
current business evaluate
resources
mission, mission performance
objectives,
and
strategies
Perform
internal audit Select Devise
to identify policies
strategies to
key strengths pursue
President
service inventory
Inventory Transportation
obsolescence
Objectives More inventory Less inventory
Frequent Long production
processing
Fast delivery Lowest cost
routing
Field Less Plant
important annual objectives in labor relations, routes, fleet, and financial condition. But
its highest priority involved maintaining the integrity of selected debt-related measures
tht would satisfy key creditors who could otherwise move to force bankruptcy.
Pirorities are usually established in one of several ways. A simple ranking may be based
on discussion and negotiation during the planning process. However, this does not
necessarily commuicate the real difference in the importance of objectives, so terms
such as primary, top, or secondary may be used to indicate priority. Some businesses
assign weights (for example, 0-100 percent) to establish and communicate the relative
priority of each objective. Whatever the method, recognizing the priorities of annual
objectives is an important dimension in implementing the strategy.
Systematic development of annual objectives provides a tangible, meaningful focus
through which managers can translate long-term objectives and grand strategies into
specific action. Annual objectives give operating managers and personnel a better
understanding of their role in business’s mission. This clarity of purpose can be a
major force in effectively mobilizing the “people assets” of a business.
A second benefit involves the process required to derive annual objectives. If
these objectives have been developed through the participation of managers
responsible for their accomplishment, they provide an “objective” basis for
addressing and accommodating conflicting political concerns that might interfere
with strategic effectiveness. Effective annual objectives become the essential
link between strategic intentions and operating reality.
Well-developed annual objectives provide another major benefit: a basis for
strategic control. It is important to recognize here the simple yet powerful benefit
of annual objectives in developing budgets, schedules, trigger points, and other
mechanisms for controlling strategy implementation.
Annual objectives can provide motivational payoffs in strategy implementation. If
objectives clarify personal and group roles in a business’s strategies and are also
measurable, realistic, and challenging, they can be powerful motivators of managerial
performance-particularly when they are linked to the business’s reward structure.
While annual objectives provide a powerful tool in operationalizing business strategy,
they aren’t sufficient in themselves. Functional strategies, the means to accomplish these
objectives, must be clearly identified to encourage successful implementation. Changes
in a firm’s strategic direction do not occur automatically. On a day-to-day basis, policies
are needed to make a strategy work. policies facilitate solving repetitive or recurring
problems and guide the implementation of strategy. Broadly defined, policy refers to
specific guidelines, methods, procedures, rules, forms, and administrative practices
estabished to support and encourage work toward stated goals. Policies are instruments
for strategy implementation. Policies set boundaries, constraints, and limits on the kinds
of administrative actions that can be taken to reward and sanction behavior; they clarify
what can and cannot be done in pursuit of an organisations objectives.
Policies let both employees and managers know what is expected of them, thereby increasing
the likelihood that strategies will be implemented successfully. They provide a basis for
management control, allow coordination across organizational units, and reduce the amount
of time managers spend making decisions. Policies also clarify what work is to be done by
whom. They promote delegation of decision making to appropriate
Strategy Implementation – Aspects, Structures, Design and Change 241
Project Implementation
Strategies lead to plans, programmes, and project. Knowledge related to project
formulation and implementation is covered under the discipline of project management.
The Project Management Institute of the US defines a project as “a one-shot, time-
limited, goal-directed, major undertaking, requiring the commitment of varied skills and
242 Strategic Management
resources”. The goals or objectives for a project are derived from the plans and
programmes, which are based on the strategies adopted. A project passes through
various phases before a set of tasks can be acomplished.
Phases of Project
A project through different phases, not necessarily in the order listed below.
Conception phase: This phase is an extension of the stratey formulation
phase of strategic management. Ideas generated during the process of
strategic alternatives and choice consideration from the core of the future
projects that may be undertaken by the organisation. The project ideas that
are conceived have to be allocated priorities on the basis of which they will
be chosen for further development.
Definition phase: After a set of projects have been identified and arranged according to
the priority, they have to be subjected to a preliminary project analysis which
examines the marketing, technial, financial, economic and ecological aspects. This
analysis is done to find out whether it would stand the scrutiny of the financial
institutions, banks and investors. After this screening, the viable projects are taken up
and feasibility studies conducted. Feasibility studies are done for in-depth, detailed
project analysis and result in an adequately formulated project. The results are
documented in the form of a project feasibility report.
(Exhibit 11.5 provides an idea of what a project feasibility report may contain)
Project reports are prepared for internal as well as external purposes. Internally, the reports may
be presented to the top management ommittees or Board of Directors for approval and sanction.
Externally, the reports are submitted to financial institutions which evaluate the project proposals
for the purpose of granting financial assistance.
Currently, the central financial institutions (IDBI, ICIC, IFCI, etc.) seek the following information for
the purpose of financial assistance.
General information, such as, name, form of organisation, location, nature of project (new,
expansion, modernisation, diversification), nature of industry and products, and so on.
Information regarding project promoters
Particulars of the industrial concern seeking financial assistance
Particulars of the project (details regarding capacity, process, technical arrangements, man-
agement, location and land, buildings, plants and machinery, raw materials, utillities, efflu-
ents, labour, housing for labou, schedule of implementation, etc.
Cost of the project including land and site development, buildings, plant and machinery, technical
know-how fee, and so on.
Means of financing (share capital, rupee loans, foreign currency loans, debentures, internal cash
accruals, etc.)
Marketing and selling arrangements
Profitability and cash flow
Economic considerations (prices of competing products, economic benefits to the country and
region, development of industrially backward areas, development of ancillary industries,
etc.)
Environment considerations (water and air pollution, effluent disposal, and energy conser-vation)
Government consents including letter of intent, industrial license, capital goods clearance, import
license, foreign exchange permission, approval of technical/financial collaboration,
clearance by regulatory authorities, and so in.
Exhibit 11.5: The Contents of a Typical Feasibility Report
Strategy Implementation – Aspects, Structures, Design and Change 243
After the project definition phase, the project is cleared for implementation.
But before being implemented, the project has to be further planned.
Planning and organising phase: Detailed planning, related to different
aspects of the projects, such as, infrastructure, engineering designs,
schedules and budgets, finance, and so on, has to be completed. A project
structure which would deal with the organisation and manpower, systems
and procedures, and so on, has also to be created which would enable the
project manager to implement the project.
Implementation phase: The detailed engineering, order placement for
equipments and material awarding contracts, civil and other types of
construction, and so on, have to be undertaken during the implementation
phase leading to the testing, trial, and commissioning of the plant.
Clean-up-phase: The final phase in project implementation deals with disbanding the
project infrastructure and handing over the plant to the operating personnel.
It is to be noted that the above phases in projects are more relevant to new plants
that are being set up to implement expansion and diversification strategies. But for
other minor projects like a relocation of facilities, modernisation and upgradation of
technology. and so on, a similar, though less detailed process, may be followed.
Procedural Implementation
Any organisation which is planning to implement strategies must be aware of the
procedural framwork within which the plans, programmes, and projects have to be
approved by the government at the central, state and local levels. The procedural
framework consists of a number of legislative enactments and administrative orders,
besides the policy guidelines issued by the Government of India from time to time.
The regulatory mechanisms for trade, commerce, and India span the whole range
of legal structure from te Consititution of India, the Directives Principles,
Central laws, State laws, general laws, sector-specific laws, industry-specific
laws and the rules and procedures imosed by the implementing authorities at the
local level. The laws lay down elaborate rules and procedures to be followed.
Following th procedures laid down for project implementation constitutes an important
component of strategy implementation in the Indian context. The Government has an
eleborate set of procedures depending on the type of project to be implemented.
Government agencies at the central and state levels paly a major role while some
procedures require the involvement of the local governmental agencies. all the subjects
having a bearing on inustrial development are handled by different ministries and
departments at the central governmetn level. There are apex level commitees such as the
Cabinet Committee on Economic Affairs. Apart from these agencies, the regulatory
agencies, such as, Central Electricity Regulatory Commission (CERC), Telecom
Regulatory Authority of India (TRAI), Insurance Regulatory and Development
Authority (IRDA), also play a significant role. At the State level, the Directorate of
Industries is the pivot around which the entire industrial activity in the State revolves.
Government polices, laws, rules and regulations and procedures are constantly under
change specially under conditions where India is fast adapting to the international
environment and incorporating liberalisation and globalisation measures in its policies.
244 Strategic Management
Our purpose here is to only briefly refer to the procedural aspects of strategy
implementation. The matter here is not meant to be a presentation of a
comprehensive manual or guidelines for setting up projects in India. For that to
take place, readers would have to refer to specialised subjects such as business
and law, and the entrepreneurs would have to take resourse to specialised avide
from chartered accountants, company scretaries, industry experts and
consultants. You are advised to find out the latest available position regarding
these reguulatory mechanisms and procedures from the business press.
The regulatory elements to be reviewed are as below.
Formation of a company
Licensing procedures
Securities and Exchange Board of India (SEBI) requirements
Freign collaboration procedures
Foreign Exchange Management Act (FEMA) requirements
Import and export requirements
Patenting and trademarks requirements
Labour legislatior requirements
Environmental protection and pollution control requirments
Consumer protection requirements
Incentives and facilities benefits
Formation of a Company
The formation of a company is governed by the provisions of the Companies Act,
1956 and consists of promotion. registration, and flotation. Promotion denotes the
preliminary steps taken for the purpose of registration and flotation. Registration
involves registering the memorandum of the company, articles of association, and
the agreements with the Registrar of Companies, who issues a certificate of
incorporation. Flotation means raising the capital to comence business.
Licensing Procedures
They system of planning (or planned development) rests on three policy documents
consisting of Industrial Policy Resolution, 1956, Industries (Development and
Regulation) Act (IDRI), 1951, and the statements of 1978, 1980, 1982, and 1991. The
Policy Resolutions classify the industries into three categories. The first category
industries are those that are directly under the government. The second category consists
of industries which are promoted by the government and where the private sector
supplements the efforts. The third category industries are left for the private sector. The
IDRA, 1951 provided for a licensing system for the development and regulation of
scheduled inustries-those industries listed in the Schedule of the Act.
A license is a written permission from the government an industrial undertaking to
manufacture specified articles included in the Schedule. If the license is to be given
subject to the fulfillment of certain conditions (say, foreign collaborations or capital
Strategy Implementation – Aspects, Structures, Design and Change 245
goods import) then a letter of intent conveying the intention of the government to grant a
license, subject to the fulfillment of those conditions, is issued. Section 30 of the IDRA deals
with the Registration and Licensing of Industrial Undertaking Rules. Under this Act, a
license was necessary for establishign a new unit, manufacturing a ‘new article’ (any item
related to a scheduled industry other than those specified in the license), substantial
expansion of capacity in an existing business, and changing location.
One of the significant liberalisation measures in the post-1991 period has been to abolish
industrial licensing, irrespective of the level of investment, for all industries except a few.
These industries relate to security, defence, or environmental concerns and certain items of
conspicuous consumption that have a high proportion of important inpts.
The licensing procedure requires the applicant to approach the Secretariat for
Industrial Assistance (SIA), which is a common secretariat for receiving and
processing all types of applications related to industrial project.
SEBI Requirements
The SEBI Act, 1992, replaced the Capital Issues Control Act, 1956, to deal with the
capital markets. It had already been in existence since 1988 and became a statutory
body in 1992. According to the SEBI Act, the SEBI has three objectives: to protect
the interests of investors in securities, to promote the developmnt of the securities
market, and to regulate the securities market. It is a quasi-judicial body, under the
Securities Laws Ordinance, 1995, to deal with issue of capital, transfer of shares,
and other related aspects. Its jurisdiction covers the primary market, secondary
market, mutual funds, foreign institutional investors, and foreign brokers.
Though certain provisionss of the Companies Act, 1956 cover the issue of capital
control, the SEBI enjoys comprehensive power of the significant aspects of the Indian
capital market. It issues guidelines from time to time to oversee matters under its
control. These guidelines are of relevance to companies accessing the capital market for
funds for projects emanating as offshoot of their corporate and business strategies. For
the purpose of stratey implementation, this Act is relevant so far as the provision of
financial resources is concerned. Apart from this, this Act also affects mergers and
amalgamations as they regulate the capital reorganisation plans for mergers.
Foreign Collaboration Procedures
Many strategic alternatives (for instance, expansion/diversification into high
technology industries) call for foreign collaboration and investment. The
government policy, in general, allows foreign investment and collaboration in a
selective basis in priority areas, export-oriented or high-technology industries,
and permitting existing foreign investment in non-priority areas.
All proposals to set up projects with foreign collaboration require prior government
approval. The regulatory framework deals with the need for foreign technology, royalty
payments, terms and conditions for collaboration agreements, and foreign investment.
Foreign investments are of two types: foreign direct investment (FDI), and foreign
institutional investment (FII) or portfolio investment. FDI can take place through wholly-
owned subsidiaries, joint ventures, or acquisition. Portfolio investment takes place through
investment by the foreign institutional investors and investments in instruments such as
global depository recepits (GDRs) and foreign currency convertible bonds (FCCBs).
246 Strategic Management
controversies regarding disasters, such as, the Bhopal Gas Tragedy of 1984 and, more
recently, the Sardar Sarovar and Narmada Sagar dam projects, and the relocation of
polluting industrial units outside the urban periphery occupying the headlines.
“Environmental aspects of nuclear power, the disappearance of plant and animal genetic
resources, the limitations of existing pollution control technologies in industry, the
destruction of wetlands and other special habitats and other issues” now engage the
popular attention in India. Inustrial activity contributes to environmental degradation in
the form of air, water, land, and noise pollution affectign the biodiversity of a region.
There are a host of Central and State laws dealing with the prevention and control of
pollution and environmental protection. Some of these are: The Environment
(Protection) Act, 1986; The Water (Prevention and Control of Pollution) Act, 1974; The
Air (Prevention and Control of Pollution) Act, 1981; The Wildlife (Protection) Act,
1972; and The Fores (Conservation) Act, 1980. Besides there are elaborate procedures
laid down under rules such as the Hazardous wastes (Management and Handling) Rules,
1989 and the Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989.
The majr responsibiltiy to deal with environmental issues lies with the State
Pollution Control Boards. The boards implement the pollution control laws. Any
new project has to seek a no-objection certificate from the board, which then
regulates and monitors the emission and discharge of hazardous wastes. Such
monitoring takes place on the basis of standards, including ambient air quality
standards for discharge of effluents and emission of smoke and vapour, and noise.
Project implementation, particularly in the case of process-based and chemical
industries, requires adherence to the procedures laid down for environmental
protection and pollution control.
Consumer Protection Requirements
In the course of strategy implementation, companies are increasingly required to
conform to legislative measures to protect the consumers. The very fact that ‘consumer
protection’ is an accepted term denotes that there is apprehension that consumers may be
subjected to unethical and unfair acts of companies and they need to be protected
through the law. The growth of consumerism and consumer awareness, coupled with
growing competition, makes it imperative that companies conform to the procedures
laid down in the law regarding consumer protection. Besides the law, there is also the
social requirement of being perceived as a consumer-friendly organisation.
In India, consumer protection is ensured through a pethora of legislation. Some
of these are: Essential Commodities Act, Trademarks and Merchandise Act, Sale
of Goods Act, Standard Weights and Measures Act, and the IDR Act. However,
the central legislation is the Consumer Protection Act, 1986, amended through
the Consumer Protection (Amendment) Ordinacne, 1993. This Act provides for
the protection of consumer rights and the redressal of consumer disputes.
The Consumer Protection Act provides for the establishment of a Central Consumer
Protection Council and State Consumer Protection Council in each State. The Department of
Food and Civil Supplies is the nodal ministerial agency for the enforcement of the Act. The
Act also provides for a three-tier consumer disputes redressal system at the District, State,
and Central levels. At the district level, there is a District Forum, a State Commission at the
State level, and a National Commission at the central level.
250 Strategic Management
These fora are primarily for the purposes of consumer disputes redresal and
remedial action by the companies.
According to the Competiton Act referred to above, consumer courts will be the
sole guardians of consumer interests since the Competition Commission of India
shall not deal with these matters.
The issue of consumer protection is highlighted in the procedural implementation at
the level of business and operational strategies, and in the implementation of
functional policies related to operations, quality, and marketing.
Procedures for Availing Benefits from Incentives and Facilites
Project implementation to put a strategy into action requires a consideration of
various incentives, subsidies, and facilites. It is beeneficial for entrepreneurs to
be aware of these so that due advantage can be taken of these.
In providing incentives, and so on, the government does not play a regulatory but a
promotional role. This role is manifested in various forms. In line with the objectives laid out
in the Inustrial Policy resolution, the government attempts to achieve employment
generation, correction of regional imbalances, promotion of export-oriented industries and
utilisation of installed capacity through higher production levels and productivity.
The primary instrument for achieving national plan objectives is regulation. Promotional
activities, however, do play an important role. The fiscal, monetary, and budgetary
policies of the government are aimed at the stimulation of activity in the priority
industrial sectors. Discetionary controlover money supply and banks and financial
institutions’ lending rates are used to affect industrial activity. Budget pronouncements
may result in the reduction of excise duties, corporate and personal taxation rates, and so
on, which increase the availability of finance for expansion activities.
The government also plays a promotional role in terms of purchasing, pricing,
distribution, availabiltity of raw materials, and provision of infrastructural facilities. A
number of industries are critically dependent on government purchases. The Directorate
General of Supplies and Disposal is the largest purchasing agency in the country. The
system of administered pricing has a far-reaching impact on many industries, such as,
steel, cement, fertilizers, and others. The distribution of many goods, such as, steel,
cement, fuel (commonly known as essential commodities) affects industries, such as,
sugar, vanaspati, edible oils, common cloth, and several oters. The government also
undertakes the supply of essential raw materials or scarce imported raw materials (e.g.
newsprint) which afects the supplier environment in many industries. In many
industries, the CSFs include the regular availability of vital raw material in sufficent
quantities. Through the provision of infrastructural facilities, suchas, power, water,
skilled manpower, banking and financial services, health services, public utilities like
transportation, and industrial sites and sheds, the government seeks to ensure balanced
regional development through a dispersal of industries.
Various state governments and Union Territory administrations offer additional schems. The
schemes are administered through the central and state level ministries and departments by
involving financial institutions. Expansion strategies can be implemented profitably if the
various incentives can be availed of under the different government schemes. In th sepcial
case of small-scale industries wishing to implement their strategies,
Strategy Implementation – Aspects, Structures, Design and Change 251
Resource Allocation
Strategists have the power to decide which divisions, departments, or SBUs are
to receive how much money, which facilities, and which executives. This is what
we mean by resource allocation.
The resource allocation decisions are very similar in that they set the operative
strategy for the firm. Assume, for example, that resources are allocated to existing
units on some formula basis (e.g., 10 percent above alst year’s budget). The implicit
operative strategy is pace expansion. If the official stratey is expansion in some lines
of business with stability in others, then greater resource flows to areas targeted for
expansion are necessary to give force to the strategy. The formula approach (such as
10 percent above last year’s budget for all lines of business) would not reinforce
such a strategy. What is important to understand is that once the strategic choice is
made, resources must follow the strategy, or we haven’t put our “money where out
mouth is.” SBU and lower managers are smart. If a firm’s strategists describe a
strategy in words but do not shift money and executive talent and other resources to
support it, the strategy will be considered a paper strategy. As with obectives, there
can be a difference between “official” and “actual” strategy. So resource allocation
decisions about how much to invest in which areas of the business reinforce strategy
and commit the organization to its chosen strategy.
Let’s consider how resource allocation is important to several strategic options. If new-
product development is seen as the key to an active offensive strategy, more funds and
personnel will be needed in research and development, with the possibility of longer-
term capital expenditures for a new plant or new equipment. If the strategy calls for
expansion in new markets, greater flows of funds for advertising, sales personnel, and/
or market research will be required. If retrenchment is under way, resource allocation is
of particular significance. Care must be taken to protect units which provide long-term
competitive advantages. Unfortunately, the “easy way out” is often used -everyone is cut
back equally, or resource flows are reduced for units which have a longer-term payout
but are short-term users of resources without commensurate revenue generation. The
usual example is to cut R & D or maintenance-the vry places where long-term
developments may be most critical for future competitive advantage. Thus shortsighted
resource allocation decisions may come at the expense of the ability to pursue a long-
term strategy.
Of course, resource allocation decisions are linked to objectives through the strategies
being implemented. Decisions about divident policies, for instance, are important in
relation to objectives and the long-term ability to attract sources of capital. Thus how to
shar expected profits among investors, management, the labor and whether to reinvest in
the business are important resource allocation choices with long-term strategy
implications. External parties play a major role. For instance, government regulations
may require a firm to invest large amounts of capital in “nonproductive” assets such as
pollution-control equipment. Influential stockholders may force the firm to make greater
divident payouts. Thus the strategic agenda is partially set by the factors influencing the
Strategy Implementation – Aspects, Structures, Design and Change 253
setting of objectives, since they will limit the resources available for
implementing strategy as expressed in the allocation decisions. Finally, resource
allocation is linke to the development of competitive advantage.
It is presumed that those approaches were considered during strategy formulation. They
key here is to make sure that preferential distributio of capital goes to the most critical
units-the units where the strategy is directed at creating competitive advantages.
This is one tool that strategists can use to link resource allocation decisions to choice of
strategy. if you recall, several prescriptions for investment and cash flow decisions were
made depending on the type of SBU identified in the matrix. Thus “cash cows” are
SBUs from which resources can be obtained for allocation to “question marks” or
“stars.” Of course, we suggested that there are several problems with this approach for
strategic choice, and they apply here as well. For instance, resource allocation for new
SBUs with initially low market shares might be overlooked. But for multiple SBU firms
this is one tool to aid thinking about how to allocate resources.
The primary appraoch to resource alocation in the implementation process is through the
budgeting system. One system for budgeting resources within one firm is the product
life cycle budgeting system used by Lear Siegler. This firm believes that the product life
cycle of the product lines should influence its budgeting of resources. It believes that
cash flow, departmental expenses, revenues, and capital expenditures should vary during
the cycle. Therefore the balance sheets and income statements should look different at
different stages of the cycle. The firm suggests adjusting resources accordingly. Thus to
the extent that the product life cycle influences strategy, budgets tied to such a cycle will
affect the product strategy. Others agree with this approach and suggest that zero-based
budgeting is particularly useful when retrenchment strategies are being used.
From a long-term perspective, the capital budget is very critical. Here, plans for
securing and distributing capital for large-scale investments are needed to
accomplish strategy. Mergers, introductions of major new product lines, an
increase in plant capacity and vertical integrations are key mission changes
which will require long-term capital investment decisions.
The more routine year-to-year allocation decisions are made within this context.
But they are also important for making sure that the strategic direction of the
firm is being followed, and they serve as a guide to future strategy. So let’s look
at this budget process in more detail.
Remember that resource allocation as expressed in the budget needs to be carefully
linked to strategy. Exhibit 11.6 shows one explanation of how these can be linked in
a multiple-SBU firm. Note that the process will involve planning at various levels in
a back-and-forth fashion over time. In a series of negotiations among managers at
the SBU and corporate levels, the strategy and plans to implement it are worked out.
The final output is a set of budgets which give force to the overall plan. Let’s look at
these stages of the budgeting process in a bit more detail.
254 Strategic Management
Prepare
SBU Define prepare Propose Receive
level SBU premises primiliminary resource approved
objectives and budget requirement budgets
and forecast changes and make
strategy final plans
Step 3
Each unit prepares a preliminary budget for the next period. Normally the unit
begins with the previous period’s budget and performance against this budget.
Next the unit states how the next period will differ from the current period. So
the next year’s budget that the unit proposes is based on the past budget plus or
minus expected changes. This shows how the units management expects to
achieve its objectives. This is a critical stage if strategic change is taking place.
The unit must specify what resources it will need to accomplish the strategy.
Step 4
The preliminary budgets developed in step 3 are reviewed and approved. The
budget department analyzes and reviews each unit’s past performance and
determines whether its projection are realistic given likely future conditions.
Afte comparing the budgets of the various units, the budget department submits
them to top management along with recommenations for approval or adjustment.
Top management examines the budgets and approves the if they are consistent
with past performance, anticipated revenues, and the firm’s strategy.
This is the stage at which the resource allocation choice will be made. Who gets the
money to hire more people, buy new furnituree or machinery, or build a new building?
In most enterprises resources are scarce, and not every unit can be given what it wants
(and says it needs). The allocation of funds can be crucial to the success of a unit (and to
the career of its manager). Loss of marketing funds for TV spots at a strategic time, for
example, can wreek a unit’s results. Because the decisions involved are so difficult, they
are often made by a budget committe or a number of managers.
Step 5
At tis stage summary budgets are usually prepared. Projected receipts and expenses are put
together, and subsidiary budgets are developed for example, the operating budget, financial
budgets, the capital budget, and expense budgets. The operating budget specifies materials,
labor, overhead, and other costs. Financial budgets project cash receipts and disbursements;
the capital budget project major additionsor new construction. The expense budgets project
expenses not covered in other budgets, such as marketing costs. Finally, in the summary
budget (profit and loss or income statement), the total obtained by combining the subsidiary
budgets is subtracted from the projected receipts. The remainder is a profit or loss. If the
budgets meet objectives, approvals are made, and the budgets are enacted. If changes are
needed, negotiations will take place.
The mechanics of preparing capital and operating budgets are beyond our purview. But
this process is important, as it relates to the formation and implementation of strategy.
Through the entire process, a variety of real problems of relevance to strategists often
emerge. Estimating both revenues and costs is very difficult. In the case of an
automaker, for example, how many new cars will the company sell? This depends on a
number of factors, such as the economy, competitors’ products, and how consumers
evaluate its product in comparison with competing products. The company’s pricing
policy and marketing image affect this estimate, as do product quality, engineering, and
the aggressiveness and reliability of dealers. Managers often handle this problem by
making their best guesses- “ball-park” estimates. Sometimes they miss. The point is, the
issues we addressed earlier affect budget preparation.
256 Strategic Management
Moreover, the question of who gets the most money from the budget has a major effect
on the work environment as well as on the careers of managers. If, as a manager, you
“lose the budget battle.” your employees will have to do more work with fewer helpers
and less desirable equipment. They will feel that you have failed them, and they will
treat you accordingly. This is one of the problems with using the product portfolio
appraoch. Few managers want to have their units known as dogs or cash cows. It is also
a problem affecting retrenchment strategies. Negotitations to protect a unit in the budget
battle may come at the expense of pursuing a strategy in the best interests of the overall
organization. Indeed, gamesmanship, overstatement of real budget needs, and even
secrecy can lead to highly political budget battles across departments.
Another problem is that the usual budget process tends to be designed for allocating
resources to existing departments or various investment proposals. These may or
may not be tied to strategic changes desired by the organization; iif they are not,
then the budget process reinforces existing resource allocation patterns.
The budget process itself can lead to problems if it is not tied to the strategic
direction of the firm. In fact, the process sets the operative strategy as we
suggested earlier. So if lower levels are unaware of shifts in strategic direction
and if top managers fail to communicate strategic change or are weak
negotiators, any intended strategy change is unlikely to take place.
Finally, you should note that the budget process is tied to the way units and
divisions are arranged organizationaly. New SBUs can be at a disadvantage if
thy are unaware of the “ins and outs” of the budget procedures used in their
organization. And if truly major strategic shifts are occuring, the structure is
likely to change along with the way resource are allocated. So let’s turn to the
second aspect of implementation structuring for strategy implementation.
The major difficulty arises due to a scarcity of resources. Financial, physcial, and human
resources are hard to find. Firms will usually face difficulties in procuring finance. Even
if finance is available, the cost of capital is a constraint. Those firms that enjoy investor
confidence and high creditworthiness possess a competitive advantage as it increases
their resource-generation capability. Physical resources would consist of assets, such as,
land, machinery, and equipment. In a developing country like India, many capital goods
have to be impored. The government may no longer impose many conditions but it does
place a burden on the firm’s finances and this places a restriction on firms wishing to
procure physical resources. Human resources are seemingly in abundance in India but
the problem arises due to the non-availability of skills that area specially required.
Information technology and computer professionals. advertising personnel, and telecom,
power and insurance experts are scarce in India. This places severe restrictions on firms
wishing to attract and retain personnel. In sum, the availability of scarce resources is a
very real problem faced in resource allocation.
Within organisations, there are several difficulties encountered in resource allocation.
The usual budgeting for existing SBUs, divisions, and departments places restrictions on
generating resources for newer units and those with a greater potential for growth.
Overstatement of needs is another frequent problem in a botoom-up appraoch to resource
allocation. The budgeting and corporate planning departments may have to face the ire of
those executives who do not get resources according to their expectations. Such
Strategy Implementation – Aspects, Structures, Design and Change 257
negative reactions may hamper the process of strategic planning itself. When
strategic budgeting is used for resource allocation, powerful units may be
divested of resources for reallocation to potential units. ‘Budget battles’ may
ensue if resource allocation affects vested interests.
It must be pointed out, however, that the CEO has a major role to play in managing the
process of resource allocation. Strategic management, based on a participative mode,
and the communication of the strategic plan to all executives creates a congenial
environment where the resource allocation decisions may be taken amicably.
Structural Considerations
We usually conceive of organisation structure as a chart consisting of boxes in
which the names of position or designations of personnel (and sometimes the
name of the person occupying the position) are written in a hierarchical order
along with the depiction of the relationship that exists between various positions.
To a strategist, an organisation structure is not only a chart but much more.
An organisation structure is the way in which the tasks and subtasks required to
implement a strategy are arranged. The diagrammatical representation of structure
could be an organisation chart but a chart shows only the ‘skeleton’. The ‘flesh and
blood’ that bring to life an organisation are the several mechanisms that support the
structure. All these cannot be depicted on a chart. But a strategist has to grapple with
the complexities of creating the structure, making it work, redesigning when
required, and implementing changes that will keep the structure relevant to the
needs of the strategies that have to be implemented.
To find out what the structural mechanisms are, it is useful to consider the case
of a new organisation which has decided to achieve a set of objectives through
the implementation of certain strategies. In the next two paragraphs, we shal
relate the ‘story’ of how structural mechanisms evolve.
The implementation of strategies would require the performance of tasks. Some of
these tasks are related to the formulation and implementation of programmes and
projects. We dealt with these tasks in the previous chapter which was on activating
strategies. Having laid the foundations of an organisation, the strategists now have
to devote their attention to the tasks, that would have to be performed on a
continuing basis for the implementation of strategies. It would be practicaly
impossible to list all such tasks, so the strategists would attempt to enumerate the
major tasks. These major tasks would have to be grouped on the basis of the
commonality of the skills required to peerform them. Having grouped the major
tasks, each category of such takss will have to be again segregated on the basis of
the ability of an individual to perform a unit of tasks. This is the process by which
organisational units, such as, departments, are created and hierarchies defined.
The total responsibilty to implement strategies has to be subdivided and distrbuted to
different organisational units. The authority to discharge the responsibilities will also
have to be delegated if the tasks have to be performed. To ensure that different
organisational units do not work at cross-purpose, coordination will have to be ensured
through communication. The performance will have to be appraised and controlled so
that the tasks are performed in a sequence and according to a schedule. Desirable
258 Strategic Management
behaviour to perform these tasks will have to be encouraged and undersirable behaviour
curbed. For this, rewards and penalties will have to be used. Since the performance of
tasks cannot be left to ehance, the creation of motivation will have to be facilitated so
that organisational effort is directed towards a common purpose. Further, individuals
will have to be trained so that objective-achieving capability is created and sustained.
The new organisation that has been exemplified will come into being and start
functioning in the manner described above. All the activites mentioned will now
have to be performed on a continuing basis.
We can not derive the different mechanisms on the basis of the above example.
These are summarised as follows:
Defining the major tasks required to implement a strategy
Grouping tasks on the basis of common skill requirements
Subdivision of responsibiltiy and delegation of authority to perform tasks
Coordination of divided responsibility
Design and administration of the inforamtion system.
Design and administration of the control system
Design and administration of the appraisal system
Design and administration of the motivation system
Design and administration of the development system
Design and administration of the planning system
The first four of these mechanisms will lead to the creation of the structure. The
other six mechanisms are devised to hold and sustain the structure. Collectively,
we could refer to the last six mechanisms as organisational systems.
Note that structural mechanism alone will not fulfill the requirements of strategy
implementation. Structure is the ‘harware’ while the otehr aspects constitute the
‘software’ of structure implementation. The other major aspects of implementation
relate to the leadership styles, corporate culture, and other related issues. These will
be dealt with in subsequent chapter. Here, we focus our attention on the structural
mechanism required for the implementation of strategies.
The prescription for consciously matching an organisation’s structure to the particular
needs and requirements of strategy has arisen out of research done by Chanler. Child has
further extended the thinking to include environment and effectiveness in the sequence
to pinpoint the nature of choices that strategists make. He says that maangerial choice
occurs at the interface of environment and strategy, which then determines the structure.
Though Chander’s thesis that strategy changes require structural changes to achieve
economic efficiency is logically powerful, subsequent researches have not conclusively
proved the relationship that structure follows strategy.
But often, structural consideration also affect-if not determine strategy, which is a case
of backward linkage. Theorists in Business policy, therefore, are more concerned with
the match that should exist between strategy and structure. In other words, a particular
strategy creates special requirements that should be fulfilled by the structure. If it does
Strategy Implementation – Aspects, Structures, Design and Change 259
not, then the structure will have to be redesigned. What shape the structure should
take if a particular strategy is to be implemented successfully is difficult to answer.
But here again, theory offer alternatives. One such alternative is to link structure to
the stage of development that an organisation exists in at a given point of time.
Besides Chander, Salter, Thain, and Scott have contributed to the thinking that
any organisation, as it grows in size and diversity, moves from a simple to a
complex organisational form. This concept is analogous of that of the product.
life cycle. Organisations too follow a life cycle consisting of the introduction,
growth, maturity, and decline phases. The life cycle of organisations could be
divided into four states that are not distinct and may overlap.
Stage I organisations are small-scale enterprises usually managed by a single
person who is the entrepreneur-owner-manager. These organisations are
characterised by the simplicity of objectives, operations, and management. The
form of the organisation is also simple an could be termed as entrepreneurial.
The strategies adopted are generally of the expansion type.
Stage II organisations are bigger than Stage I organisations in terms of size and have a
wider scope of operations. They are characterised by functional specialisation or process
orientation. The organisational form is simple functional (typically divided into the
finance, marketing, operations, and personnel departments) or process-oriented (divided
into process-based departments arranged in a particuar sequence according to the
technology employed). The strategies adopted may range from stability to expansion.
Stage III organisation are large and widely scattered organisations generally
having units or plants at different places. Each division is semi-autonomous and
linked to the headquarters but functionally independent. The divisions may have
a simple functional form depending on their particular needs. The strategies
adopted may be either stability or expanison.
Stage IV organisations are the most complex. They are generally large multiplant,
multiproduct organisations that result from the adoption of related and unrelated
diversification strategies. The organisational form is divisional. The corporate
headquarters assume the responsibility of providing strategic direction and policy
guidelines through the formulation of corporate-level strategies. The divisions
(which may be companies, profit centres or SBUs) formulate their business-level
strategies and may adopt Stage I, II or III types of structures.
The stage of development theories present a convenient way to understand the
way the structure may evolve as the organisation moves from one stage to the
next. But, in practice, many variations may occur. It is not necessary that all
organisations should pass through every stage of development. Nor does every
organisation exhibit the characteristics of exclusively one stage.
A look at the different organisations will show that they do seem to follow the different
stages mentioned above. Most companies have started as one-or tow-person units in an
entrepreneurial mode. through expanison and in time, the companies have become
bigger, creating the need for a subdivision of task which usually takes palce along
functional lines. Further, expanison creates the need for setting up additional plants, and
if diversification strategies are adopted, then the organisational forms may ultimately
260 Strategic Management
Structure Strategy
Skills Staff
Advantages Advantages
1. Failitiates control of all business s 1. Efficincy through specialization
activities.
2. Rapid decision making ability to 2. Improved development of functional expertise.
change with market signals.
3. Simple and informal motivation 3. Differentiates and delegates day-to-day
/rewar/control systems. operating decisions.
4. Retains centralized control of strategic
decisions.
Disadvantages Disadvantages
1. Very demanding on the owner- 1. Promotes narrow specialization and
manager. potential functional rivalry or conflict.
2. Increasingly inadequate as volume 2. Difficulty in functional coordination and
expands. interfunctional decision making.
3. Does not facilitate development of 3. Staff-line conflict
future managers 4. Limits internal development of general
4. Tends to focus owner manager on managers.
day to day matters and not on future
strategy.
Strategy Implementation – Aspects, Structures, Design and Change 263
Structure is not an end in itself but rather a means to an end. It is a tool for
managing the size and diversity of a business to enhance the success of its
strategy. This section identifies structural options and examines the role of
structure in strategy implementation.
Exhibit 11.9 is a model of simple and functional organizational structures. In the
smallest business enterprise, the simple structure prevails. All strategic and
operating decisions are centralized in the owner-manager’s domain. With the
strategic concern primarily survival, and the likelihood that one bad decision could
seriously threaten continued existence, this structure maximizes that owner’s
control. It also allows rapid response to product market shifts and the ability to
accommodate unique customer demands without coordination difficulties. Simple
strcutures encourage employee involvement in more than one activity and are
efficacious in businesses that serve a localized, simple product/market. This
structure can be very demanding on the owner-manager and, as volume increases,
can pressure the owner-manager to give increased attention to day-to-day concerns
at the expense of time invested in strategic management activites.
Functional structure predominates in firms that concentrate on one or a few
related products/markets. Functional structures gorup similar tasks and activites
(usually production/operations, marketing, finance/accounting, research and
development, personnel) as separte functional units within the organization. This
specialization encourages greater efficiency and refinement of particular
expertise and allows the firm to seek and foster distinct competencies in one or
more functional areas. Expertise is critical to single-product/market companies
and to firms that are vertically integrated.
The strategic challenge in the functional structures is effective coordination of the
separate functional units. The narrow technical expertise sought through specialization
can lead to limited perspectives and different priorities across different functional units.
Specialists may not understand problems in other functional areas and may begin to see
the firm’s strategic issues primarily as “marketing” problems or “production” problems.
This potential conflict makes the coordinating role of the chief executive critical if a
strategy is to be efectively implemented using the functional structure. Integrating
devices (such as project team or planning committes) are frequently used in functionally
organized businesses to enhance coordination and to facilitate understanding across
functional areas.
When a firm diversifies its products/service lines, covers braod geographic areas,
utilizes unrelated market channels, or begins to serve distinctly different customer
groups, a functional structure rapidly becomes inadequate. For example, functional
managers may wind up overseeing the production or marketing or numerous and
different products or services. And coordination demands on top management are
beyond the capacity of a functional structure. Some form of divisonal structure is
necessary to meet the coordination and decision-making requirements resulting from
increased diversity and size. Such a strcutre is illustrated in Exhibit 11.10 & 11.11.
264 Strategic Management
Advantages Advantages
1. Forces coordination and necessary 1. Fosters potentially dysfunctional
authority down to the appropriate competition for corporate-level resources.
level for rapid response. 2. Problem with the extent of authority given
2. Places strategy development and to division managers.
implementation in closer proximity 3. Potenital for policy inconsistencies
to the divisions unique enviornment. between divisions.
3. Frees chief executive officer for 4. Potential of arriving at a method to broader
strategic decision making. distribute corporate overhead costs that
4. Sharply focuses accountability for is acceptable to different division performance.
managers with profit responsibility.
Retains functional specialization
within each division.
Good training ground for strategic
managers.
A B C D E F G H I
Advantages Advantages
The matrix organization provides for dual channels of authority, performance responsibilty,
evaluation and control, as shown in Exhibit 11.12. Essentially, subordinates are assigned to
both a basic functional area and a project or product manager. The matrix from is included to
combine the advantages of functional specilization and product/project specialization. In
theory, the matrix is a conflict resolution system through which strategic and operating
priorities are negotiated, power is shared, and resources are allocated internally on a
“strongest case for what is best overall for the unit” basis.
Advantages Advantages
for a current strategy. Whether this is due to interia, organizational politics, or a realistic
assessment of the relative costs of immediate strcutural change, historical evidence
suggests that the existing structure will be maintained and not radically redeisgned until
a strategy’s profitability is increasignly disproportionate with increasing sales.
of issues before the task of orgnisational design is over. The major issues are the
sapn of management, basic departmentation, line and staff relationships, and the
use of committees and group decision-making.
The span of management refer to the ways in which activities can be grouped. The
different structures, as described in the previous section, consist of various departments,
each of which deals with a distinct group of activites. The activities could also be
organised on the basis of the processes leading to the manufacture of a product or
provision of a service. These structures form the core of basic departmentation.
Line and staff relationship describe the way in which authority is dispersed
within the organisation structure. Where a higher-level manager exercise direct
supervision over a subordinte, authority is delegated in a direct line or steps.
Staff positions are advisory in nature. Within the staff departments, however,
authority may again be delegated on the basis of line relationships.
The use of committees and group decision-making is often done as an organisational
device though it is not per se a part of the organisational structure. Still, committees
are considered an inseparable part of structure. When they are constituted formally
on a permanent basis, the committees work on the basis of specially delegated
authority and responsibility. Other similar forms of group decision-marking as well
as group functioning are the teams, task forces, project units, liasion groups, etc.
It is to be pointed out that significant changes in thought related to organisation
structural design has been taking place worldwide and is impacting Indian companies
too. The major ideas in this context are: restructuring, reorganisation, reengineering,
dealyering, flatter structures, and so on. Restructuring and reorganisation refer to
changing the organisation structure in line with the changes in the environment and
strategies. Renigineering (or business process reengineering) is the fundamental
rethinking and radical redesign of business processes to achive dramatic gains in areas
such as cost, quality, service, and speed. Dealyering is reducing the number of levels in
the organisational hierarchy with a view to facilitate better control and communication
within the organisation. Flatter structures result due to dealyering. In this manner,
organisations are attempting to adapt their organisational structures. Some of the
changing structural characteristics of organisations are encapsulated in Exhibit 11.14.
Macy and Izumi highlights the comparative changing characteristics of the traditional
organisational design and the emerging thinking in organisational design.
Their comparative analysis is given below.
Traditional organisation design Emerging organistional design
Characteristic Characteristics
One large firm Small business units having cooperative
relationships
Vertical communication patterns Horizontal communication patterns
Centralised top-down decision-making Decentralised particpative decision
making
Vertical integration Outsourcing and virtual organisations
Work-/quality-based teams Autonomous work teams
Functional work teams Cross-functional work teams
Minimum training Extensive training
Individual-focussed specialised job Value-chain team-focussed job design
design
Exhibit 11.14: Changes in Contemporary Organisation Design
Strategy Implementation – Aspects, Structures, Design and Change 271
The above description of the five essential steps, four related issues, and the
emerging thought in organisational design are, in fact, a theoretical baiss for the
creation of structure. It is up to the strategists to use this theoretical foundation and
the emerging thought to design an organisational structure that would suit the
requirements of a particular strategy. The skills of strategists are put to test when
they design an appropriate organisational structure. Agin, a more rigorous test is
faced when the existing structure has to be changed to suit the requirements of a
modified or new strategy. We take up this issue in the following subsecion.
Right at the outset, it must be pointed out that organisation change takes place along two
broad dimensions: the structural changes and the accompanying behavioural changes.
The first type of change is related to modifications in structural relationships and may
entail the creation or disbandment of departments or managerial positions. The second
type of change relates to the concomittant behavioural modifications that are essential to
absorb the impact of organisation changes. Students of management are quite familiar
with the concepts of formal and informal organisations. What we are referring to then in
the first and second cases are the formal and informal organisations respectively. While
formal organisational changes are mainly administrative in nature and can be brought
about the by the means of organisational planning and implementation the informal
organisation changes are more complex and evolve as a response to formal
organisational changes.
An example will serve to illustrate the nature of structural and behavioural changes. An
organisation which follows a corporate-level strategy of stability has a simple functional
structure in existence. This firm now plans to diversify into a related area and this
strateigc shift as to be reflected in organisational changes. The choice of structure leads
to divisional form of structure where a new division with a few departments is created to
support the related product lines. Some of the functions like personnel and finance are
retained at the corporate level as centralised departments.
Again, for instance, taking the case of business strategies it can be seen that a firm
pursuing alow-cost strategy in a mature, stable business can do with a simple functional
structure. If there are some changes required then these can be planned in advance. But
if a firm operates in a volatile environment and decides to adopt a differentiation
business strategy then a divisional structure could serve its needs better. Like this, the
firm can hope to cater to changing customer needs more effectively.
Keeping in mind the type of environment faced by a firm at a given time and the
strategy that it adopts at the corporate-and business-level, the structural change
can be envisaged. But organisational changes go beyond mere structural
modifications and encompass the issues of how people would react to the
changed situation, how the new relationships would be managed. and in what
manner would the cohesiveness of the organisation be maintained.
Organisational change “is the movement of an organisation away from its present state
and towards some desired future state to increase its effectiveness. Even in most stable
organisations, change is necessary just to keep the level of given stability. The
economic, social and technological environment is so dynamic that without the change
272 Strategic Management
that would be adaptive to the changed environment, even the most successful
organisations will be left behind, unable to survive in the changed environment.
Rapid change is not confined to high technology industries such as computers,
software, biotechnology, robotics and so on. Many organisations which were
once considered stable such as publishing, retailing, and even hospitals now face
the need to adapt to change quickly. Accordingly, management must
continuously monitor the outside environment and be sufficiently innovative and
creative to find new and better utilisation of organisational resources so that the
organisation always maintains its competitive edge.
Whether the change involves creativity and innovation within the organisation or
simply a response to outside forces which may require organisational
realignment, mangement must be aware of the forces and the need for change.
Typically, organisations have little choice but to change. According to Barney
and Griffin, the primary reason cited for organisational problems is the failure by
managers to properly anticipate or respond to forces for change.
Recent surveys of some major organisations around the world have shown that all
successful organisations are continuously interacting with the environment and making
necessary changes in their structural design or philosophy or policies or strategies as the
need be. The survey found that 44 percent of Japanese firms, 59 percent of American
firms, 60 percent of German firms and 71 percent of South Korean firms so surveyed
had significantly changed their organisational structure between 1989 to 1991.
Adapting to change would mean that the organisations have to learn new
technologies, new markets and new ways of managing. In the future, the only
truly sustainable source of competitive advantage will be the organisation’s
ability to change and learn new skills.
Learning organisations are firms that view change as a positive opportunity to learn
and create new sources of competitive advantage. Bringing about organistional
change that facilitates learning is not an easy task. Since, “man follows the path of
least resistance”, it is easier to employ known methods than to change to new
methods where the outcomes may not be as certain. Hence, a change will be easier
to make and adjust to, if the potential rewards after the change are sufficiently
attractive. Accordingly, senior managers must be sensitive to any such resistance to
change from the subordinates and take steps to encourage all constituencies of the
organisation to join in and facilitate the needed changes. It must be noted, however,
that what the employees resist is not the technical changes which they are generally
willing to adopt, but the social changes which are the changes in the human
relationships that most often accompany technical changes.
As a reuslt, the emphasis must be on reducing the strain that might develop due
to changes in these relationships.
Some organisations possess characteristics that greatly enhance their capabilities
to adapt to rapid change. Pitts and Lei have listed six such characteristics as
shown below in Exhibit 11.15.
Strategy Implementation – Aspects, Structures, Design and Change 273
High tolerance
Multiple Frequent rotation
of failure
experiments of Managers
Learning
Organization
the lower level subordinates are much closer to the points of operations and are in a
position to know the problems more quickly and more accurately and hence are
more likely to make the right decisions. Such authority encourages innovation,
learning and creativity. For example, Johnson and Johnson, a conglomerate of 50
operating divisions, has decentralised all divisions so that each division has the
authority to do whatever is needed to succeed in its market. This high degree of
decentralisation has enabled all business units to become some of the most
successful innovators in their products and in their marketing techniques.
4. Openness and Diversity
Management must keep two-way channels of communication open and must be
responsive to the diversity of viewpoints. This is a critical point for the learning process
because learning generally comes from outside sources and closing the door to new and
diverse ideas will be a hindrance to learning. Managers must be able to appreciate other
peole’s viewpoints, values and experiences as sources of input for learning and decision
making and must be willing to listen to their ideas and perspectives. For example, when
Sony Corporation, which is primarily in electronics business acquired Columbia’s film
producers and studio managers to share their viewpoints with Sony managers so that
they can learn about the specific film making problems. This openness has resulted in
solving many problems that their film division faced.
5. High Tolerance of Failure
If managers are punished for their failures, then they will shy away from some good but
risky adventures, even if the rewards of success are very high. All innovative projects
have always some chances of failure. Fear of failure should not keep innovation under
check. Accordingly, senior management must encourage their subordinates if their
projects and efforts are meaningful and reasonable. In successful companies, failures are
defined as experiments to learn from and an acceptable part of the learning process and
personal growth. A case in point is Sony’s development of digital cameras during the
1980s. The buying public was not ready for it and the project failed. Sony did not
penalise their managers who where responsible for developing this product, but instead
encouraged them to learn from this experience and apply their expertise in designing
new products and technologies. Even with this failed product, Sony gained many
insights into digital technology which was used into the new versions of many electronic
devices such as CDs, VCRs and so on.
6. Multiple Experiments
The dynamics of technological advancements has made the development of new
products, in keeping up with technology, much more complex task and process. Some
times, a number of alternatives need to be pursued simulataneously to determine which
one is better. It also makes it unlikely that a superior appraoch will be overlooked. The
cost of running multiple projects should also be taken into consideration. The potential
benefits must outweight any costs involved. Looking at a problem from different angles
and viewpoints might result in better solutions. Multiple approach also encourages
people to look at situations differently and exposes them to different ways of thinking
about and doing things. Sony Comapany’s success with Walkman was a result of
experimentation by several project teams which looked into the type of format which
would be most desirable by consumers and would also be relatively easy to manufacture.
Strategy Implementation – Aspects, Structures, Design and Change 275
and to keep pace with the changing world in technological development and
processes.
Negotiation and Agreement. Negotiation and agreement technique is used when costs
and benefits must be balanced for the benefit of all concerned parties. This is
often used in bargaining with labour unions. It is specially important in situations
where the individuals or groups will end up as losers as a result of the change and
where such individuals or groups have considerable power to resist.
Willingness for the Sake of the Group. Some individuals may be willing to
accept change, even if they are not totally satisfied with it, if the group that
they belong to is willing to accept such change. This is specially true about the
individuals who have a continuous psychological relationship with the group
so that there is sufficient group cohesiveness or group togetherness.
Accordingly, management must isolate such groups who have considerable
influence upon it members and try to induce the group to involve itself in the
change process and accept the necessary change.
These measures can assist considerably in reducing resistance to change. The
management must understand that while unilateral use of authority and the
power vested with them can sometimes bring change, and it may be necessary to
use this power under certain situations, such a change would be highly resented
and may be short-lived. For long-term stability of the change process, the
management must invite active and willing participation from the employees
and share with them the benefits derived from the change.
The unfreezing process basically cleans the slate so that it can accept new
writings on it which can then become the operational style.
2. Changing to New situation
Once the unfreezing process has been completed and the members of the
organisation recognise the need for change and have been fully prepared to accept
such change, their behaviour patterns need to be redefined. H.C.Kellman has
proposed three methods for reassigning new patterns of behaviour. These are:
Compliance. Compliance is achieved by strictly enforcing the reward and
punishment strategy for good or bad behaviour. Fear of punishment, actual
punishment or actual reward seem to change behaviour for the better. For
example, many people have stopped smoking because of the warning
given by the Surgeon General of the United States that smoking causes
cancer of the lungs.
Identification. Identification occurs when members are psychologically impressed upon to
identify themselves with some given role models whose behaviour they would like to
adopt and try to become like them. Many public organisations use celebrities as role
models in advising young people not to use drugs.
Internalisation. Internalisation involves some internal changing of the individual’s
thought processes in order to adjust to a new environment. Members are left alone
to look within themselves and they are given freedom to learn and adopt new
behaviour in order to succeed in the new set of circumstances. Sometimes, such
soul searching bring about a new dimension to the philosophy of existence and
thus bring about changes in such behavioural patterns that are not considered
socially, morally or professionally redeeming.
3. Refreezing
Refreezing occurs when the new behaviour becomes a normal way of life. The
new behaviour must replace the former behaviour completely for successful and
permanent change to take place. Accordingly, in order for the new behaviour to
become permanent, it must be continuously reinforced so that this new acquired
behaviour does not diminish or extinguish.
This must be clearly understood that the change process is not a one time
application but a continuous process due to dynamism and ever changing
environment. Accordingly, the process of unfreezing, changing and refreezing is
a cyclical one and remains continuously in action.
The implementation of this three step change model can be seen in the case of kidnapping
victims or prisoners of war or deprogramming of some religious cultists. The prisoners of
war, for example, may be brainwashed into believing that they are fighting a losing and
immoral war and that their perceived enemy is really their friend. This can be done by certain
shock treatments which involve these three steps of unfreezing, changing and refreezing
process as explained earlier. If these prisoners return back to their own country, the process
can be repeated to bring them back to their original behaviour. Another methodology to
induce, implement and manage change was also proposed by
Strategy Implementation – Aspects, Structures, Design and Change 281
Kurt Lewin, who named it “force-field analysis”. This analysis is based upon the
assumption that we are in a state of equilibrium where there is a balance between
forces that induce change and forces that resist change. To achieve change we must
overcome this status quo. The change forces are known as “driving forces” and the
forces that resist change are known as “restraining forces” as shown below:
Managers who are trying to implement changes must analyse this balance of
driving and restraining forces and then strengthen the driving forces or weaken
the restraining forces sufficiently so that the change can take place.
Some of the other strategies pursued by strategic managers to bring about changes
are: reenginering, restructuring and innovation. In order to achieve the goal of
competitive edge, the organisations may adopt one or more of these strategies.
Reengineering: Reengineering is the “fundamental and radical redesign of
business processes to achieve dramatic improvements in critical,
contemporary measures of performance such as cost, quality, service and
speed. Reengineeering involves complete overhaul of the organisation and
strategic managers must completely rethink about the operations and activities
of the organisation and focus on business processes rather than on business
functions. A business process is any activity that promotes efficiency. It is not
the responsibility of any one function but cuts across functions.The primary
emphasis of reengineering is on customer satisfaction. The question that
strategic managers always keep in focus is “how can we reorganise the way
we do our work and our business processes in order to provide the best quality
and the lowest-cost goods and services to the customer?” The proper response
to this question results in fundamental changes in the business processes. The
next question that requires attention is, “how can we now continue to impove
our processes and find better ways of managing task and role relationships?”
Restructuring: Resturcturing involves making changes in the structure of the
organisation so that some relationships in the organisation can be combined to
make a flat structure and this should improve communication and thus efficiency.
This requires eliminating unproductive division as well as some layers of
corporate hierarchy. The process of making a flat organisation by reducing the
number of managerial levels and divisions is known as downsizing. There are a
number of reasons why downsizing becomes necessary. It is possible that the
company has grown to be too t all over the years so that the human resources are
not otimally utilised. Also a change in economic environment may reduce
business activity thus necessitating structural changes. When Jack Smith became
the Chief Executive Officer (CEO) of General Motors (GM) in 1992, the
company had 22 levels in hierarchy and more than 20,000 corporate managers.
Smith quickly moved to restructure the company so that it resulted in 12
hierarchical levels and 10,000 corporate managers.
282 Strategic Management
needed so that people can understand the purpose for the changes. Giving and
receiving feedback is the fourth step; everyone enjoys knowing how things are
going and how much progress is being made.
lgor Ansoff summarizes the need for strategists to manage resistance to change
as follows:
Observation of the historical transitions from one orietnation to another shows that, if
left unmanaged, the process becomes conflict-laden, prolonged, and costly in both
human and financial terms. Management of resistance involves anticipating the focus of
resistance and its intensity. Second, it involves eliminating unncessary resistance caused
by misperceptions and insecurities. Third, it involves planning the process of change.
Finally, it involves monitoring and controlling resistance during the process of change.
Due to diverse external and internal forces, change is a fact of life in organizations.
The rate, speed, magnitude, and direction of changes vary over time by industry and
organization. Strategists should strive to create a work environment in which change
is recognized as necessary and beneficial so that individuals can adapt to change
more easily. Adopting a strategic-management approach to decision making can
itself require major changes in the philosophy and operations of a firm.
Strategists can take a number of positive actions to minimize managers and employees
resistance to change. For example, individuals who will be affected by a change should
be involved in the decision to make the change and in decisions about how to implement
change. Strategists should anticipate changes and develop and offer training and
development workshops so managers and employees can adapt to those changes. They
also need to communicate the need for changes effectively. The strategic-management
process can be described as a process of managing change. Robert Waterman describes
how successful (renewal) organizations involve individuals to facilitate change:
Implementation starts with, not after, the decision. When Ford Motor Company
embarked on the program to build the highly successful Taurus, management gave
up the usual, sequential design process. Instead they showed the tentative design to
the work force and asked their help in devising a car that would be easy to build.
Team Taurus came up with no less than 1,401 items suggested by Ford employees.
What a contrast from the secrecy that characterized the industry before! When
people are treated as the main engine rather than interchangeable parts, motivation,
creativity, quality, and commitment to implementation go up.
284 Strategic Management
Chapter 12
Behavioural Implementation Leadership, Culture,
Politics, Power, Values and Ethics
Obectives to large extent reflect the expectations of stakeholders. To be successful,
however, a company has to prioritize its objectives. Achievement of the objectives
with emphasis on priorities is the basic aim of corporate strategic decisions.
It is important to emphasize that culture , value, and leadership, jointly and severally,
significantly influence the shaping of corporate strategies. The culture of an organization is
reflected in the way that peope in the organization perform tasks, set objectives, and
administer resources to achieve them, and is in its turn strongly influenced, if not moulded by
the values orginating largely from national history, tradition, and ethos. A third element in the
threesome is leadership. It is universally recognized that the more successful organizations
are those that are well led rather than those that are only well managed. Perhaps the most
essential quality of a leader is his vision reflected in the mission of the organization. A
successful leader is however, endowed with the capacity to convert that vision into the
mission and goal of the organization and lead the organization to the achievement of its
goals. For sustained success of the organization, however, this vision needs to be
transmitted to become the abiding core values and culture of organization.
Objectives tend to emerge as the wishes of the most dominant coalition, usually
the management of the organization, although there are notable exceptions.
However, in pursuing these objectives the dominant group is very strongly
influenced by its reading of the political situtation (i.e. the perception of the
power structure). For example, they are likely to set aside some of the
expectations in order to improve the opportunities of achieving others.
Special reference must be made to the power of shareholders. Some of them have a
short-term viewpoint being basically interested in quick return. Others have a longer-
term view and also look for growth in the value of the shares. With the evolution and
development of a professional managerial class the direct intervention of shareholders
has become much less frequent. They tend to remain quiescent so long as their
expectations are at least modertaely met. If, however, they perceive or are made to
perceive any threat to these prospects or are reasonably convinced of a better return
under an alternative management, their intervention is immediate and decisive.
To what extent do the current strategies reflect the influence of any one of a
combination of these factors?
How far would these factors help or hinder changes that would be necessary to
pursue new strategic? External Influences
Values of Society
Attitudes to work, authority, equality, and a whole range of other important issues
are constantly shaped and changed by society at large. From the point of view of
corporate strategy it is important to understand this process for two reasons:
The values of society change over time and corporate strategies need to be
adapted accordingly.
Individuals and
groups
Companies that operate internationally would have the added problem of having to
cope with very different standards and expectations across countries.
Two examples are interesting.
Hofstede has undertaken extensive research into how national culture influences
employee motivation, management styles, and organizational structures. He
concludes that individual conuntries are markedly different from one another.
Terry, in his study of influence of British culture on the performance of managers
concludes that the biggest single advantage of the British is that they do not
pame when things get rough. On the other hand, their identifiable traits are
insularity, chauvinism, and a low regard for professionalism in business.
Organized Groups
Individuals often owe allegiance to other groups such as trade association and professional
bodies, which greatly influence their attitudes. Consequently, very often this professtional
staff has a strong ‘professional’ view of its role which may not accord with the managerial
view of how it can best be used as a resource. At the corporate level, the entire organizational
ethos of the company may be influenced by its membership of a trade association or similar
body. These bodies may exert influence informally, but often seek
286 Strategic Management
Market Situation
Different companies face quite different market conditions and any one company will face
different conditions over time. Consquently, the attitude of people within the company will
also change, often quite markedly, as external conditions change. Policy decisions that can be
made in companies facing a highly competitive and depressed market will meet with
considerable resistance in other companies facing less stringent conditions.
People are also influenced by the position of the company in relation to the life
cycle of its products and market. People who have only known a company
during a period of rapid growth may have developed expectations that are
inapropriate when its product enter the stage of maturity.
Leadership Implementation
The role of appropriate leadership in strategic success is highly significant. It has
repeatedly been observed that leadership plays a critical role in the success and
failure of an enterprise and “it has been considered one of the most important
elements affecting organisational performance. For the manager, leadership is the
focus of activity through which the goals and objectives of the organisation are
accomplished”. While dealng with the role of strategists we learnt about the roles
that different strategist paly in strategic management. In particular, the role of chief
executives as organisational leaders was discussed with a view to highlight the
importance that is accorded to them since they are the most important of all
strategists. Here, we discuss the leadership role that is assigned to strategists in
general. We start with a review of the leadership theories and what lessons can be
drawn form them for the purpose of strategy implementation.
Alber S King traces the historical development of leadership theories and identifies nine
evolutionary eras, each focussing on a specific theme of leadership.
Era Focus on
1. Personality Traits and qualities, and great personalities
2. Influence Relationship between individuals
3. Behaviour Actions of leaders
4. Situation Situation in which the leader operates
5. Contingency Dependence on behaviour, personality influence
exerted by the leader on sobordinates, and situation
6. Transactional Role-differentiation and social interaction betwen the
leader and subordinates
7. Anti-leadership Absence of a real concept of leadership
8. Culture Culture of the entire organisation
9. Transformational Use of influence to create intrinsic motivation
The tenth era, which King terms as the integrative era, may probably focus on
an integration of the different approaches.
The evolutionary eras, as classified by King, bring into clear focus the
changing emphasis of different theories of leadership. A greater understanding
of the phenomenon of leadership may come through the integration of the
different approaches in future.
Sziglayi and Wallace have proposed an integrative model of leadership based on
three different theoretical approaches of leadership: trait (or personality),
behavioural, and situational theories. Their integrative model of leadership
includes four factors on the basis of which behavioural scientists and practicing
managers can attempt to understand the pehnomenon of leadership. These four
factors are: the leader (individual characteristics, leadership style, dimension and
reinforcing power); the subordinate (individual characteristics, and perception),
the situation (nautre of task, nature of group, organisational factors, sources of
influence other than the leader), and the performance outcomes.
From the above, it can be seen that leadership has proved to be an elusive concept. Yet,
the different attempts at explaining the phenomenon of leadership have increased our
understanding of the issue and provided significant insights into its complexities.
Several conclusions can be drawn from theory regarding the manner in which
leadership could be implemented by strategists. On the basis of its present state
of knowledge, it can be said that the leader must.
develop new qualities to perform effectively
be a visionary, willing to take risks, and be highly adaptable to change
exemplify the values, goals, and culture of the organisation, and be aware of the
environmental factors affecting the organisation
pay attention to strategic thinking and intellectual activities
addopt a collective view of leadership in which the leaders influence is dispersed
across all levels of the organisation.
288 Strategic Management
Vision
The leader’s vision which gives point to the work of others should have the
following attributes. The vision must be different.
A plan or a strategy which is a projection of the present or a replica of what
everyone else is doing is not vision. A vision should
reform the known scene.
reconceptualize the obvious,
connect previously uncounected dreams.
The vision must make sense to others.
The vision must be comprehensible
The leader must live the vision.
He or she must only believe in it but must be seen to believe in it.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 289
The leader must remember that the vision remains a dream without the work of others
As a company grows older and takes on the role of a historical firm rather than
an emerging one, however, the role of providing strategic leadership shifts to the
general management and shareholders and, the ‘founder’ entrepreneur often
finds his personal vision and goals at variance with those of the organization and
finds himself pushed by the wayside.
This also marks a clear distinction between Japanese strategic leadership and that
of the West, in particular the USA. Most Japanese industrial organizations still
have their first generation entrepreneurs as CEOs who have successfully
imprinted their personal values and attitudes on the organizations concerned and
been able to impart sustained dynamism to them.
The significant difference between Japanese and Western leadership is, however,
elsewhere. Generally speaking, Japanese firms do not have individual leadership but
group leadership. What is very important is how individual ‘followership’ is
transformed into group leadership and through this organizational process individual
passiveness is transformed into collective dynamism. We cannot induce a dynamic
and innovative set of organizational decision sets from a simple aggregation of a set
of non-innovative and reserved individual decision codes. What is required is some
form of quality transformation process, in turn requiring an organizational device to
effect it, so that the passive decision codes of individual memebers can be changed
into active codes of the firm. (Exhibit 12.3).
The most significant aspect of Japanese strategic leadership is the development and
use of this transformation device. This is reflected in a chain of leadership based on
merit in apparent contradiction to the concept of seniority embedded in the Japanese
management system. The Japanese reward system has two distinct characteristic.
While respect for seniority remains undisturbed as does lifetime employment as the
backdorp, there is a bifurcation at senior levels. Those with requisite merit are
promoted within the organization and those lacking it are diverted out of the
organization into subsidiaries or supplier organizations under the firm’s umbrella.
Summarizing, Japanese culture and value are reflected in:
Consensus in decision-making;
respect for seniority;
individual suggestions converted to group recommendations;
meritoeracy;
entrepreneurial and innovative leadership;
discipline.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 291
Lastly, the cultural trait of quest for quality (as reflected in Buddhist teaching) has led
Japanese industries from copying Western design improvement to innovation. This again
stems from the concept of wa kan yoh sai (Japanese spirit and Western technology).
What about the Future?
Tattwajnananda infers that the Japanese concept of ethics, values, management
style is only a transient phenomenon and is likely to go the Western way.
A few symptoms tend to confirm this inference. For instance:
In a survey Exhibit 12.4 labour mobility reflected a shift from a strong tendency for
labour to by and large remain content with the same employer throughout life.
This shift, although comparatively minor, is still significant.
It is a reflection of the seniority system supporting lifetime employment
from inside and the wage system based on seniority forming the “closed”
systems found in Japanese firms.
Japanese youth have also started changing towards greater meritocracy
(Exhibit12.5).
Percentage
Never 71.5
Once 14.8
Twice 5.4
Three times 2.2
Four or more times 1.3
No answer 4.9
Percentage
Only by seniority 10.2
Corporate Culture
The phenomenon which often distinguishes good organisations from bad ones
could be summed up as ‘corporate culture’. The well-managed organisations
apparently have distinctive cultures that are, in some way, responsible for their
ability to successfully implement strategies. “It has been clearly demonstrated
that every corporation has a culture (which often includes several subcultures)
that exerts powerful influences on the behaviour of managers.” We shall see
below what corporate culture is, how it influences corporate life, and how it can
be managed so that it becomes strategy-supportive.
“Organisational (or corporate) culture is the set of important assumptions-often
unstated-that members of an organisation share in common”. There are two
major assumptions in common: beliefs and values. Belief are assumption about
reality abd are derived and rainforced by emperience values are assumptions
about ideals that are derived and worth striving for. When beliefs and values are
shared in an organisation, they create a corporate culture.
The manifestation of coproate culture in an organisation is evident in:
shared things (e.g. the way people dress)
shared sayings (e.g. “let’s get down to work”)
shared actions (e.g. a service-oriented approach)
shared feelings (e.g. ‘hard work is not rewarded here’)
These shared assumptions can help to decipher the composition of the corporate
culture of any organisation.
relationships with its environment and its strategy”. “Culutre is a strength that can also
be a weakness”. As a strength, culture can facilitate communication, decision-making
and control, and create cooperation and commitment. As a weakness, culture may
obstruct the smooth implementation of strategy by creating resistance to cahnge.
An organisation’s culture could be characterised as weak when many subcultures
exist, few values and behavioural norms are shared, and traditions are rare. In such
organisations, employees do not have a sense of commitment, loyalty, and a sense of
identity. Rather than being members of organisation these are wage-earners. There
are several traits exhibited by organistions that have a weak or unhealthy culture.
Some of these are: politicised organisational environment, hostility to change,
promoting bureaucracy in preference to creativity and entrepreneurship, and
unwillingness to look outside the organisation for best practices.
An organisation’s culture could be strong and cohesive when it conducts its
business according to a clear and explicit set of principles and values, which the
management devotes considerable time to communicating to employees, and
which values are shared widely across the organisation.
There are three factors that seem to contribute to the building up of a strong
culture. These are: (a) a founder or an influential leader who established
desirable values, (b) a sincere and dedicated commitment to operate the business
of the organisation according to these desirable values, and (c) a genuine
concern for the well-being of the organisation’s stakeholders.
Exhibit 12.6 illustrates how corporate culture in two different groups-multinational
subsidiaries and professionally-managed companies versus family businesses and
non-resident Indians’ companies-may create a different impact on an organisation.
While the views expressed in this exhibit are decidedly in favour of family business
and non-resident Indian’s companies, there is no doubt that “in each sector of
industry, the management style and corporate culture is distinctive”. What is more
appropriate to say is that Indian organisations, particularly family businesses, “seem
to be in a ferment now”, and that companies “known for their conservatism and
traditional orientation have to now shift over to a more open and participative
corporate culture if they have to maintain progress.”
Having discussed that constitutes corporate culture and how it affects corporate
life, it is important to understand its relationship with strategy. Since each
strategy creates its own unique set of managerial tasks, strategy implementation
has to consider the behavioural aspects and ensure that these tasks are performed
in an efficient and effective manner. Managerial behaviour arising out of
corporate culture, can either facilitate or obstruct the smooth implementation of
strategy. The basic question before strategists, therefore, is how to create a
strategy-supportive corporate culture. In other words a major role of the
leadership within an organisation is to create an appropriate strategy-culture fit.
294 Strategic Management
Miles and snow categorize organizations into three basic types in terms of how they behave
strategically, namely (i) defenders, (ii) prospectors, and (iii) analysers. Their characteristics
of policy-making are summarized in Exhibit 12.8. When undertaking strategic analysis,
grouping provides a means of assessing the dominant culture of the organization. By
reviewing the type of systems and the historical choices of strategies, the analyst can
distinguish between a defender and a prospector organization, and hence judge the extent to
which new strategies might fit the current core beliefs of the organization (the recipes). In the
context of the current discussion on leadership, the central dilemma for organizations should
now be clear. A cohesive culture also demands,
Organization Dominant Preferred Planning and control
type objectives strategies systems
Defenders Desire for a secure Specialization: cost-efficient Centralized, detailed
and stable niche in production, marketing control Emphasis on
market emphasis on price and service cost efficiency
to defend current business; Extensive use of formal
tendency towards vertical planning.
integration.
Prospectors Location and Growth through product and Emphasis on flexibility,
exploitation of new market development (often in decentralized control,
product and market spurts). Constant monitoring of use of ad hoc
opportunities environmental change. Multiple measurements.
technologies.
Analysers Desire to match new Steady growth through market Very complicated
ventures to present penetration. Exploitation of coordinating roles
shape of business applied research Followers in between functions
the market. (e.g. product
managers) Intensive
planning.
Exibit 12.8: Different Types of Organization Cultures and their Influence on Policy
Making
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 297
and often produces, ‘cloning’ within the organization, with more and more like
minded individuals being selected for key leadership roles or becoming
‘socialized’ into the organization’s dominant beliefs and approaches. There are,
however, dangers of blindly following this ‘recipe’.
Recipe
Environmental Strategy Organizational
forces capabilities
Performance
Exhibit 12.9: The Role of the Recipe in Strategy Formulation
The relationship and distinction between the recipe and organizational strategy need to
be clarified. Environmental forces and organizational capabilities do not in themselves
create organizational strategy: it is poeple who create strategy. The mechanism by which
this is done is the recipe. The forces at work in the environment, and the organization’s
capabilities in coping with these, are made sense of through the
298 Strategic Management
assumptions and beliefs called the recipe and on the basis of this strategy is formulated.
The strategies that managers advocate and those that emerge through the social and
political processes are then typically configured within the bounds of this recipe.
However, environmental forces and organizational capabilities, whilst having this direct
influence on strategy formulations, nevertheless do impact much more directly on
organizational performance. It is, however, necessary to distinguish between actual
influence and managerial perception of influence on the organization. Lack of attention
to this difference can give rise to significant problems.
The recipe may, thus be a very conservative influence or strategy, and
particularly since the links between the recipe itself and the way things are done
in the organization are likely to be close. This is illustrated Exhibit. 12.10.
Rituals &
myths
Routines Symbols
The
recipe
Control Power
systems structure
organizational
structure
Thus, for example, the links between the power structure in the organization and the
core set of beliefs held by mangers in that organisation are likely to be strong. The
recipe represents the ‘fomula for success’ which is taken for granted in the business
and likely to have grown up over years; the most powerful groupings within the
business are likely to have derived their very power from association with this set of
beliefs and their ability to put them into operation. One implication of this is that it
is likely that a purely analytical questioning of the recipe will not only be taken as
evidence of the analyst’s lack of understanding of the problems of the business but
may actually be perceived as a political threat, rather than objective analysis, for it
will very likely be perceived as an attack on those most associated with such core
beliefs. Even if managers ‘intellectually’ accept such analysis, they may be more
influenced by the reciped and its cultural underpinnings in formulating, persisting
with, and adjusting strategy. The recipe is also likely to be associated with control
systems, routines, and rituals of the organization that will tend to preserve the status
quo. The point is that the recipe is not just a set of beliefs and assumptions; rather it
is embedded in a organization-specific cultural web that legitimizes and preserves
the assumptions and beliefs in the organization. Such a cultural web for an
imaginary company is shown in Exhibit 12.11.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 299
Routines
Well established Recipe Power
informal procedures Security of lending Power of the
Promotion based on Service to clients longest serving
experience, given Loyalty to society CEO traditionally from
dead mens shoes Importance of on finance/administration
Importance of paper the job experience Head of branch network
work procedures Importance of powerful influence
Communications
Formal Controls
Planning system:
i. based on history Organisational
ii. mainly short-term Structure
financial controls to Functional
ensure stability and Centralized
maintenance of margin
of lending and
borrowing
Bureaucratic
greater degree. Under usual conditions of evolutionary strategic change, this drift
may not be disastrous and can usually be made up. In cases of environmental
discontinuity, however, as has been already discussed and we appear to be
currently facing such drift may be akin to disaster and incrementalism is simply
inadequate. This chapter argues that managers would have to accept the need for
urgent change in recipe if necessary, entailing a tremendous cultural shift. This is
perhaps the greatest challenge facing management today. Exhibit 12.12
illustrates the dynamics of recipe change discussed earlier.
Tighter
Controls
Step 2
Reconstruct or develop
new strategy
Step 3
Abandon old recipe and
adopt new one
Organise these statement about the firm’s culture in terms of managers tasks and
key relationships.
Assess the risk that the organisation’s culture presents to the realization of the planned
strategic effort. This is done by first determining the importance of the culture products
and then determining their compartibility with the intended strategy.
identify and focus on those specific aspects of the organization’s culture that are
highly important to successful strategy fomulation, implementation, and
evaluation. It may then be possible to develop alternative organizational
approaches that better fit the existing culture, as well as to design planned
programs to change those aspects of culture that are the source of the problem.
Schein indicates that the following elements are most useful in linking culture to stategy:
Any strategie plan must be consistent with the organization’s culture. A strategic
plan for a bank had been prepared by a group of external consultants. Although the
plan was excellent, its probability of success was low. It would have required the
bank’s officers to become aggressive and engage in cut-throat practices with the
bank’s competitors, something the officers were neither able nor willing to do.
Power is the potential ability to influence behaviour and change the course of events by
overcoming resistance and convincing people to do things they would not otherwise do.
Power and influence are subjects often approached critically with disdain and
apprehension. It is considered more socially correct to be critical of power than to speak
of how to get more of it and use it to your advantage. And yet power is esential to
change, progress, and improvement. As Warren Bennis and Burt Nanus, noted
authorities on the subject of leadership, have explained, “Power is at once the most
necessary and the most distrusted element exigent to human progress.”
The application of too much power is to be reviled, but the absence of power is to be
lamented. While power has been and continues to be abused. It is hard to imagine that
the best response to this problem is to do away with it. We may be uncomfortable with
the idea of using power to achieve our own ends, but we must also be dismayed when
crises arise because of its absence. Jeffrey Pfeffer, author of Managing with Power,
contends that “one of the major problems facing organizations today is not that too
many people exercise too much power, but rather the opposite: too few poeple exercise
enough power.” Bennis and Nanus reach a similar conclusion: “These days, power is
conspicuous by its absence.... There is something missing .... POWER, the basic energy
to initiate and sustain action translating intentions into reality, the quality
without which leaders cannot lead.”
As these quotes suggest, power is an essential part of implementation. If an organization
is to see its strategies implemented, it must rely on leaders who understand the sources
and uses of power and act accordingly. The primary reason that power carries so many
negative connotations is that it is usually defined too narrowly. Power carries so many
negative connotations is that it is usually defined too narrowly. Power and influence can
take many forms, and, to be effective in using them, you need to move beyond overly
simplistic negative stereotypes. We can classify the alternate forms power takes by
considering its sources and its uses, as shown in Exhibit. 12.13, both the institution and
the individual have been identified as sources of power. Institutional power is based on
formal authority granted by the organization that allows one to govern the actions of
others. The amount of institutional power is typically a function of one’s position in an
organization: the higher one’s position, the greater the power granted by the institution.
This relationship between hierarchical level and this type of power explains why we
often speak of someone’s having “power over” something or someone.
but there are many influential people whose power does not come from their
instituitonal positions. A classic example is the computer “whiz kid” who holds
greater power than organizational ranking would suggest because he or she is the
only one who really understands how the company’s computers work. This is a form
of influence known as expert power. Or there may be someone to whom others
regularly defer out of respect and admiration, even though this person is not in a
formal position to exercise such influence, an example of referent power:
In example such as these, the source of the power is not the institution but the individual.
Power that stems from within an individual is usually formed over time as a result of many
actions and through various interactions with others. Power that comes from within an
individual rather than from an institution is considered more appropriately as “power
through,” rather than “power over.” The types of power derived through
304 Strategic Management
through through
COMMANDING SHAPING
Institution manifests itself through: manifests itself through:
Orders Given Culture Change
Structures Chnged “Rewired” Networks
Source System Changed Modified Agendas
of
Power Power and influence Power and influence
through through
PERSUADING INDUCING
Individual manifests itself through: manifests itself through:
Expertise Charisma
Negotiation Politics
Communication Role Modeling
Commanding
Much of what people find most unattractive about power is found in the north west
corner of Exhibit 12.13, where influence comes in the form of commands. Here,
power derive from institutional sources is used explicitly: based on formal authority
a manager gives orders and uses rewards or punishments to enforce them. We call
this combination of source and use of power commanding. This type of power is
readily abused; when abused, it manifest itself in ways that range from petty
favoristism to fascism. Naturally, such misuse of power is disliked and discouraged.
However, it would be a gross overstatement to say that explicit use of institutionally
derived power is always bad. There are may circumstances in which such power is
very appropriate the classic example being military action. Military operations
depend on a command and control form of power in which the source of authority is
specified by the institution and the use of authority is often necessarily explicit.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 305
But the use of commands is not limited to military applications. The command-and-
control approach to implementing a plan of action is neither inherently right nor
inherently wrong for business organizations. Its use depends on the situation at
hand. In the simple and/or stable situations in which strategic programming is
feasible, a command-and-control approach to implementation may be not only
reasonable but desirable. In such a situation, institutionally derived power used in an
overt manner may be very effective in keeping an organization on track and moving.
However, as we have also discussed, the number of organizations that are able to
rely exclusively on strategic programming is shrinking. This suggests that, for
most leaders to be as effective as possible, they will need to use forms of
influence well beyond formal authority.
Those who are higher in an organization can have a much greater impact on the
organization’s structure (both macro and micro), as well as its resourcing and control
systems. Controlling these organizational elements is not as blatant as issuing
commands, but it can have an even greater impact. Commands usually apply to a fairly
small subset of the organization, while altering the context and systems of an
organization may have a much farther-reaching effect. By using institutionally granted
authority to alter these elements of the organisation, managers can escert tremendous
amount of power to help bring about desirable changes. Though less obtrusive than
commands, changes in the formal elements of organization structure and systems are
still fairly explicit and obvious uses of institutionally derived power.
Research has shown that these explicit uses of institiutionally granted power are often
less effective than other aproaches that are less heavy-handed and more implicit. For
instance, one study found that of seven forms of power surveyed, coercive power (the
one close to our “commanding” category) was the least effective. Research findings
such as these suggest that most managers need to take actions that entail the use of
power in other ways. We advocate that managers develop and employ all the different
combinations of sources and uses of power. Moving away from the northwest corner
and drawing on other forms of power from throughout this exhibit is what we call using
a “full-portfolio” approach to power. By develoing a full portfolio, one can become less
reliant on commanding and other uses of obtrusive formal authority. You should
recognize that we are not decrying the use of power altogether. While we stress the need
for decreased reliance on commanding, at the same time we stress the increased use of
other forms of power. For example, we will argue that one of the most effective uses of
institutional power is “shaping” instead of commanding.
Shaping
An organization’s networks and culture are the elements of its context that provide the
backdrop against which everyday behavior plays out. We are often unaware of precisely
how these elements of context affect us, although when we do stop and think about it,
most of us will agree that their impact is immense. This being the case, there is an
opportunity for leaders who can shape networks and culture to have a more important, if
less obvious, impact on their organizations than they might have by relying on their
formal authority. For example, research has shown that in today’s flatter organizations
networks are emerging as particularly important sources of power. One study concluded
that one of the most important differences between influential managers and less
306 Strategic Management
or the society. What blurs the distinction is a lack of personal values and a sense
of business ethics.
More than 30 years ago, esteemed politica scientist Norton Long wrote, “People readily
admit that governments are organizations. The converse- that organizations are
governments-is equally true but rarely considered.” Like it or not, organizations have
many of the same characteristics as governments do, chief among these being politics.
As Jeffrey Pfeffer puts it. Organizatons, particularly large ones, are like governments in
that they are fundamentally political entities. To understand them, one needs to
understand organizational politics, just as to understand governemnts, one needs to
understand government politics. Experienced managers agree with these theorists, but
they are not necessarily happy about it, as shown by the reported in Exhibit. 12.14.
These data show that experienced managers recognize organizations as power entities
and that succesful or powerful executives must behave politically. However about half
the respondents believe polities are detrimental to organizational efficiency and a happy
organizational life and think management should try to rid organization of their politics.
While we may empathize with this desire, it it not realistic. For thing, while half the
people may want to be rid of politics, half do not. As long there is such a large number
of managers who “believe in” politics, organizations be political entities. But beyond
such simplistic arguments, there are more common force at work that sustain politics in
organizations. Note that 42 percent of managers surveyed believe that politics help
organizations function effectively-as many as those who believe that politics are
detrimental. Who is right? both.
Henry Mintzberg, whose theories of management we have drawn from here throughout
this text, also agrees that politics are neither inherently good nor bad sees a definite
place for politics in bringing about needed organizational change argues that, most of
the time, organizations benefit from avoiding the divisive that politics foster. However,
he also argues that this is not always the case and sometimes an organization needs to be
shaken up by its politics in order to about needed changes. He writes, “Most of the time,
the cooperative pulling together ... is to be preferred, so that the organization can pursue
its established strategy perspective. But, ocasionally, when fundamental change
becomes necessary, the organization has to be able to pull apart through the competitive
310 Strategic Management
force of politics. The librium, “when an organization hopes to adhere to what Mintzberg
calls “its established strategic perspective,” the absence of politics is beneficial, as it
fosters the cooperation and efficiency that facilitate the incremental changes that are
dominant during these periods. That is why Mintzberg writes, “Politics often impedes
necessary [incremental] changes and wastes valuable resources.” However, the paradigm
shifts that form the “punctuation” part of the model are so difficult to bring about that
only powerful political forces may be strong enough to cause a break with past thinking
and allow a new order to emerge. In describing the disruptive nature of such paradigm
shifts, Mintzberg concludes that “political challenge may also be the only means to
promote really fundamental change.” Summarizing the alternating need for political
tension and apolitical harmony, he concludes, “The organization must, in other words,
pull apart before it can pull together again.”
This suggests that managers need to be very sophisticated in their use of politics,
knowing not only how to use politics to get things done but when to downplay
politics and encourage harmony. With the need for such political sophistication in
mind, we offer the following advice to those who seek to harness political forces.
Admit that politics are inevitable. Politics exist whenever different groups have
different ideas that they want to see implemented and the individuals in the groups
work to see their shared ideas moved forward. Can you imagine an organization in
which this did not happen? In which no one shared ideas about what should
happen and/or no one was willing to work to see their ideas advanced? Surely such
a lethargic organization would not long survive. Most of the organizations we
know are filled with politics but carefully controlling how you engage in politics
and how they are allowed to affect your organization.
Resolve to practice principled politics. What many people find most abhorent and
politics is their being used for personal gain. Recall from Exhibit 4.29 that 70
percent of the respondemts agreed the “ you have to be political to get ahead
organizations.” While it is true that political behavior is often directed at furthering
one’s personal advantage, this is not politics’ only role. As we discuss above,
politics can be a constructive force for bringing about desirable organizational
change. The concept of “principled politics”is premised on the notional that the
primary role of politics should be strengthening the organization, not the politician.
Recognize that, when you want to get something done, it will be considered
both politically and objectively. Since politics are inevitale, plan for them.
Recognize that, as you advance your ideas, they will meet with resistance from
others who have different ideas they are trying in advance. Some of the
resistance your ideas meet will be based on concern about their merits as
assessed from an objective standpoint. Other resistance will be more political
in nature. Either form of insistance can stop your progress, and it is myopic to
focus exclusively on one or the other.
Be clear up front about what you will and won’t do. The politically heated
moment in which your adrenaline is following and events are unfolding rapidly
is not the place or time to wonder whether you will regret a particular course of
action later on. Think things over beforehand, and come to some clear personal
guide lines about how you will behave under a broad set of varying scenarios.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 311
Use the forethought to keep yourself in check and avoid doing anything
under pressume that you would normally not do.
Use openness and honesty to undermine unprincipled politics. Unprincipled politics
are a mold that cannot stand the light of public scrutiny. Let others know what you will
and won’t do. Openly talk about your motives and why you want to advance the ideas
you are pushing. Ask others not to share opinions about others with you unless they are
comfortable with those statements being repeated publicly. When you disagree with
others, be willing to share your reasons for disagreeing. Deal with people face-to-face,
and whenever possible, avoid the kind of behind-the-scenes, “smoke-filled-rooms”
politics that can be so carrying and destructive.
culture and dictate the way how politics and power will be used and, at the other
end, clarify the social responsibility of the organisation.
The twin issues of personal values and business ethics have come to occupy centre
stage in management. There is an increasing awareness around the world about
ethical practices in business. International organisations such as the World Bank and
IMF are concerned about whether the aid provided by them is used for the intended
purposes and not frittered away by corrupt government officials. ‘Transparency
International’ brings out an annual rating of countries on an index of corruption that
serves as a guideline for foreign investors and international donor agencies.
Within India, there are significant social, cultural, political, technological, and
economic factors affecting the state of personal values and business ethics within
industry. Corporate governance has attracted worldwide attention as a means to
induce ethical behaviour in business.
A typical dilemma faced by strategists is to somehow reconcile the pragmatic
demands of work (which often degenerate to a distortion of values and unethical
business practices to the call of the ‘inner voice’ which somehow prevents them
from using unethical means for achieving organisational goals. This dilemma stems
from the fact that apparently the value system of the organisation has alreay been
contaminated beyond redemption. Some analysts attribute this to the acceptable
transition of a developing society where social mechanisms have become obsolete.
Corruption in industry, which is a major by-product of the degradation of value and
ethics, is also related to the inability of industry to stand up to the discretionary
powers of a regulatory system designed and administered by an unholy alliance of
bureaucrats and politicians. But repeated observations have shown that excellent
organistions that have an explicit belief in, and recognition of, besides other values-
the importance of economic growth and profits, are driven by values rather than
avarice. It has been possible for Indian companies such as Asian Paints, Bajaj Auto,
ICICI, Infosys, and Amul to excel on the basis of superordinate goals-a set of values
and aspirations and corporate culture. Strategists, therefore, have to provide the right
values and ethical sense to the organisations they manage. Exhibit 12.15 provides
material on which to determine the ‘rightness’ of values and ethics based on Indian
psycho-philosophical thought.
Personal values and ethics are important for all human beings. They are specially
important for strategists as they are custodian of immense economic power vested in
business organisations by society. The possession of personal values by strategists is
good, but the important issue is whether it is right to let them affect the considerations
for strategy formulation and implementation. Rather a more relevant question could be:
Can strategists prevent their personal values from affecting strategy formulation and
implementation? To seek answer, witness what Christensen and others say: “Executives
in charge of compnay destinies do not look exclusively to what a company might do or
can do. In apparent disregard of the second of these considerations, they sometimes
seem heavily influenced by what they personally want to do.” If we now look at the last
proposition in Exhibit 12.15, we find that it is indeed true. The intentions of individuals,
that is, their ‘purity of mind ’ as decision-makers within an organisation matter a lot in
strategic management. There has to be a right connection between values, ethics, and
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 313
Prof S K Chakraborty of IIM, Calcutta has done extensive pioneering work on Indian psycho-
philosophical thought, contained in ancient texts, to derive insights for the purpose of developing
managerial effectiveness. His basic idea is to rely on education versus training, values versus
skills, principles versus policies, and wisdom versus knowledge to develop managerial
effectiveness. His model of managerial effectiveness is based on seven Indian thoughts: the
concept of self and reality, disidentification, theory of Gunas, theory of Samskaras, the doctrine of
Karma, theory and method of work, and a giving model of motivation.
With regard to values and ethics rooted in Indian thought, several ideas have been proposed:
The concept of self in man has to embrace the spiritual dimension beyond the physical, social and
economic dimensions.
The creative energies of human beings are derived from, and rooted in, the Supreme Creative
Intelligence.
Managerial decision-making requires the interplay of both analytic and holistic faculties.
The final resolution of managerial conflicts lies in the de-egoisation of the self.
The key to cooperation and teamwork lies in realising that the same atman dwells in all.
The quality of managerial decision-making and skills can be improved through an understanding
and internalisation of the doctrine of karma.
Motivational strategies need to be based on a giving model rather than a needing model of man.
Ability for developing effective leadership style requires an understanding of three qualities of
man: sattwa (righteousness), rajas (selfishness), and tamas (laziness).
All managerial decisions are subjective in the ultimate analysis and the efectiveness of such
decisions depends critically on the purity of the mind of the decision-maker.
Exhibit 12.15: Values and Ethics in the Context of Indian
Psycho-Philosophical Thought
strategy. It is imperative that strategists take strategic decisions not only on the
basis of purely economic reasons but also consider values and ethics.
Business ethics has traditionally been considered to integrate core values, such as,
honesty, trust, respect, and fairness into strategic management, policy-making,
practising management, and decision- making. It has been perceived as a set of legally
driven codes, in the form of a list of do’s and don’ts for the company executives, that
have to be complied with. A significant change is occurring in considering business
ethics as central to managing organisations. Companies are formulating value-based,
gloablly-consistent codes for ethical understanding and appropriate decision-making at
all levels even as they face immense external challenges.
Business ethics is being identified as a major source of competitive advantage. In 1999 a
study by the DePaul University of 300 companies found that firms making an explicit
commitment to follow an ethic code provided more than twice the shareholder value
than those that did not. An earlier study of 1997 had found that companies with a
defined commitment to ethical principles outperformed others. What this means is good
ethics is also good business. Companies recognised as ethical organisations are able to
attract investment and human capital, retain talent, differentiate themselves in the
martets, and create a perception of being customer-friendly As the chairman of a
successful company in India says: “Value-based organisations have dmonstrated that
even so-called soft concepts can be extremely powerful. Money can’t buy reputation and
integrity; both have to be earned. Organisations based on strongly-held shared values
amongst their customers and employees (and in that order) have been able to
professionalise and develop their market potential through strong brand loyalty and
relationship building with their constituents”.
314 Strategic Management
Recognising the immense significance of business values and ethics in the context of
good business, there have been attempts at describing how ethics can be imbibed as
a part of managerial activities through the adoption of a practical framework.
At this point, it is necessary to differentiate between values and ethics. Values are
personal in nature (e.g. a belief in providing customer satisfaction and being a good
paymaster) while ethics is a generalised value system (e.g. avoiding discrimination in
recruitment and adopting fair business practices). Business ethics can provide the
general guidelines within which strategic management can operate. Values, however,
offer alternatives to choose form. For example, philanthropy as a business policy is
optional. A strategist may or may not possess this value and still remain within the limits
of business ethics. It is values, therefore, that vary among the strategists in an
organisation, and such a variance may be a source of conflict at the time of strategy
formulation and implementation. A major set of tasks in strategy implementation is to
create consistency among the business values and ethics and the proposed strategy. This
is done through inculating the right set of values, reconciling divergent values, and
modifying values that are not consistent with the strategy.
Organisations derive values and ethics from their corporate culture. Corporate
culture, as we have seen earlier, is the outcome of the shared assumptions that
individual members of the organisation have. The right set of values and a code of
ethics have to be formulated by an organisation on the basis of its founding
philosophy, cherished traditions, norms of ethical behaviour, and social requirments.
Several organisations have formulated such codes for their members.
Inculcating values and ethics: Once the values and ethical codes are formulated,
strategists have to set about inculcating them. Several actions could be taken for this
to be accomplished. A representative list of such actions is given below.
Considering values and ethics in recruitment and selection to ensure
compatibility of the character traits of potential employees to the ethical
system of the organisation.
Incorporating the statement of values and code of ethics into employee traning
and educational programmes
Example-setting by top management in terms of actions and behaviour that
reinforce the values.
Communication of the value and code of ethics through wide publicity and
explanation of compliance procedures.
Constant monitoring of compliance by superior staff and top management
Consistent nurturing of values within the organisation through their integration
into policies practices, and actions.
Paying special attention to those parts of the organisation that are susceptible to
ethically-sensitive activities, such as, purchase and procurement, dealing
with government and other external agencies.
Reconciling divergent values: Strategists have to reconcile divergent values and
modify values, if necessary. A typical situation of value divergence may arise while
setting objectives and determining the precedence of different objectives. One group of
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 315
Fixation: This is a state where, in a sense, the goal owns the person. Management by
objectives is in effect replaced by being managed by one’s objectives; investing in goals
beyond our capacity for critical judgement, thus treating the self as a means not an end.
Rationalization: Two types of rationalization dominate the landscape in the context of
business and work life: Loyalty (appealing to fiduciary obligations to shareholders in the
face of market competition) and legality (appealing to the permissibility of a behaviour
or policy within the constraints of the law). Each provides an excuse for questionable
business behaviour, though not always plausibly.
Detachment: Repeating the fixation-rationalization ‘loop’ becomes a self-reinforcing
habit. This habit leads eventually to a kind of callousness, which some observers have
called a separation of the head from the heart. Competitiveness and goal seeking
eventually drive out compassion and generosity, making more serious compromises
easier as time passes. The detached organization, like the detached individual, loses the
ability to connect its behaviour to the larger human picture. The division of labour
becomes the division of responsibility, and the division of responsibility becomes the
fragmentation or dilution of responsibility beyond recognition.
Teleopathy then is a moral condition in which the unbalanced pursuit of purpose manifests
itself in three symptoms: fixation, rationalization, and detachment. It is the principal
occupational hazard of business leadership in a market economy, and its consequences for
the lives of individuals, companies , and society at large can be devastating: alienation,
stress, unreasonable demands on work time, loss of creativity, and loss of community.
Avoiding teleopathy as an occupational hazard requires a new outlook on the part of
management. In particular, in an increasinly global market place, convictions about
core human values and virtues acutely need to be clarified and strengthened.
The foundation for such clarity and strengthening can be found by considering
four core (cardinal) virtues that have for two thousand years serve as a
foundation for moral theory and practice: prudence, temperance, courage, and
justice. Each relates fairly directly to current challenges in business ethics.
In the current industrial and business context, Exhbit 12.16 shows the role each
of them might play in organizational decision-making balancing the pursuit of
purpose and increasing corporate awareness.
Business leaders who understand the importance of these organizaton virtues
will take their companies social consciences in hand, avoiding tempting appeals
to competitive dilemmas and other familiar excuses.
The essence of responsible management perhaps lies in appreciating the art of
orchestration affirming multiple values in a compatible and healthy way.
That the principles enunciated above go beyond religious boundaries will be realized if it is
remembered that Shakers, Quakers, and Masonic lodge members abide broadly by the
same concepts. Whether they can be realistically extended to the industries today is,
however, moot question.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 319
Prudence
Attention to spiritual Avoids fixation on Customers and Fair competition, Control systems,
and higher order maturity and employees responsible employees,
goods and service detachment from primarily, but also marketing to consumer audits.
being fully human competitors amogn needs not just
others. wants
Courage
Rising above sole Avoids denials and Again wide- Strong board Readership
reliance on market rationalization in ranging but membership, development
pressures and legal the name of primarily owners, diverse staff programmers:
compliance; need strength for investors, composition, reward for
for responsible risk. concience and employees, and internal whistle- initiative,
others do it community. blower individual spirit.
protection.
Justice
Attention to Avoids fixation on Employees Fair Regular audits of
distributive as well self-serving ends: customers, and compensation affected
as aggregative rationalization at communities of employees stakeholders:
productive results the cost of the primarily, but also job security, representative
to process as well weak. shareholders and consumer voices.
as to overcome. competitors. product safety
and quality, tax
honestly.
The two secular ideals that man pursues are artha (wealth) and kama (pleasure). They
lead to spiritual freedom (moksha) if they are subordinated to dharma (moral conduct).
Ego Management Through :
Self-control: A ruler’s self conquest is the foundation of his kingdom. He who
controls his self, controls all. only then will regionalism, linguistic bias,
caste conflicts, and religious tensions cease.
Self-respect:
Sarve yasya vinetarch
Sarve panditamaninach
Sarve mathattvamicehanti
Kulani tadavisate
That race in which every one considers himself the leader, eveyone regards
himself to be wise, and everyone hankers for recognition, goes to ruin.
A man of self-respect has confidence in his own abilities and respects those in
others. He helps others to help themselves. He does not feel that his talents are
going unnoticed and that he deserves much more than he is getting.
Self effort: Udyuginam purusasim hamupati kaksmih darivam iti kapurushah
vadanti. Daivan nihatya kuru purusamatmasakhya yatma krte yadi na
sidhyati kuta dosha.
The goodess of wealth becomes propitious to the industrious lionhearted
person. Only cowards say. Alas! fate, fate!’ But dismissing fate, act bolddly on
your own strength. If something fails, after putting in effort, what is the harm?
Self-effort at the right time can chagne the future. On who listens well, decides
on a goal with proper deliberation and then lets go the goals and concentrates
on the means succeeds. His very presence inspires his co-workers.
Excellence in work: Yoga
karmasu kausalam
Gita
Yoga is skill in work
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 321
Indian ethics mean every individuala acquiring a capacity for independent thinking
and having and utilizing the freedom to take the right moral decisions after gathering
all the relevant facts and weighing the pros and cons of alternatives.
A somewhat different approach is found in the Gita:
Janami, dharman na cha me, pravriti,
Jamamyadharman na cha me nivritti,
Taya hrishikesha hridi sthitena,
Jatha nijuktohsmi thatha karomi
I know what is right but do not have the will to follow it. I know what is wrong
but do not have the willl to desist from it. Hence, oh Lord! I shall do whatever
you guide me to do residing in my heart.
Although the models discussed above are rooted in Hindu philosophical
scriptures, their idealistic natur would, in all probability, make them
unacceptable across the religious divide existing in India.
Neither bears any relation to the historical tradition and reality existent in India.
Both are totally utopian in nature, do not consider the current realities and the
reasons for their evolution.
Both are highly individualistic, concentrating on how one should improve the
‘self’ and do not indicate how this can be extended to group thinking.
Both indicate the direction for achievement of ethical goals individually through
self-realization (nishkam karma in the Chakraborty model and the
subordination of the secular ideals of artha [wealth] and karma [plaesure] to
dharma [moral conduct] to achieve freedom [moksa] in the Tattwajnanananda
model) and are silent about the linkage of self-realization to leadership.
The future (or rather, desirble future) of Indian industry under Chakraborty’s
ethico-moral concepts has been briefly delineated earlier. It is a moot
question whether Indian industries will, by following those ethico-moral
concepts, survive in th existing competitive atmosphere.
Capitalism is the first social system in which the wealthy could claim they
received their wealth as a ‘just’ reward for performing a socially
useful function.
‘Property is theft’ (Pierre Proudhon).
Capitalists can be likened to race of wolves: he who gets there does so at
the cost of others (Che’ Guevara).
‘Morality lay on the side of the heavier artillery’ (Voltaire).
Capitalism begins not with material self interest but by “giving”. Because the
inventor has no guarantee of return on his investment; his investment
consitutes a gift to the community (George Gilder in Wealth and Poverty).
The Light of Day: This is manifested in the statement ‘If you cannot discusss
your decision freely and openly, it is not ethical.’ In this the metaphysics of
‘reason’, the realism of ‘dialectic’, the pragmatism of ‘phenomenology’
and simple home truths regarding human behaviour have been neatly
encapsulated. At the same time ‘categorical imperative’ has been
emasculated, ‘utilitarianism’ has been rendered impotent.
A review of these nine aspects of ethical dilemma amply shows that each of
them is open to differing interpretations and hence they together fail to provide a
general basis for formulating ethical norms.
Equity issues are, however, not limited to salary and pay considerations. They
can also arise in the pricing discretion companies are permitted under the
applicable law. As in the case of compensation practices, ethical questions can
be raised with regard to either results or the means used to attain them.
Equity Rights Honesty Exercise of
corporate power
Executive salaries Corporate due Employee conflict of Political action
Comparable worth process, interest. committees
Product pricing Employer health Security of company Workplace safety
screening records Environmental issues
Employee privacy Inappropriate gifts Disinvestment
Sexual harassment Unauthorized payments to Corporate contribution
Affirmative action foreign officials Social issues raised
Equal employment Advertising content by religious
opportunity. Government contract organizations
Shareholders issues Plant/Facility closures
interest Financial and cash and down sizing
Employment at will management procedures
Whistle blowing Conflict between
corporation s ethical
system and business
practices in foreign
countries
Rights are treatments to which a person has just claim. The origin of the claim may be
legislation, legal precedent or community notions of dignity. Modern views or
rights are generally protective in nature. They seeks to defend individual autonomy
from encroachment by powerful institutions or the community at large.
Societies accept the concept of rights to varying degrees. The Japanese, for
example, rely heavily on their traditional concept of reciprocal obligation,
which mandates discussion, conciliation, and adjustment of differences instead
of an appeal to abstract concepts of justification. Rather than filing lawsuits,
Japanese who allege discrimination usually form a ‘victim group’ that
negotiates with company representatives. The resulting accommodation does
not set a precedent, but establishes a basis for ongoing dialogue.
Dignity is a subcategory of rights, where protection is rooted in the
community’s sense of elemental decency rather than regulated by specific
constitutional, judicial or legislative mandates. For example, employee
privacy and sexual harassment are issue subject to increasing legislative
and judical activity, but the legislative and judicial systems have yet to find
an absolute formula for extending these rights to employees.
Honesty in corporate ethics relates to the integrity and truthfulness of a company’s
actions or politics. Issues of honesty arise both in connection with corporate
behaviour and with employees acting under the company’s nominal supervision.
Misleading advertising, questionable financial and cash management procedures,
‘gifts’ for foreign officials and waste or fraud in the performance of government
contracts are examples of corporate behaviour that may be labelled dishonest.
Other honesty issues arise in connection with the company’s responsibility for
supervision of those who act in its name, and the reciprocal obligation of employees to
observe company and community standards in their business dealings. The
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 329
Against this backdrop, a typical leader of the future would be the CEO of an
international company. Certain requirements of such a leader perhaps merit
consideration, but before that the nature of the likely developments may be shortlisted.
The pace of change will be felt in several areas. Globalization will no longer be an
objective but an imperative, as markets open and geographic barriers become
increasingly blurred and perhaps even irrelevant. Corporate alliances, joint
ventures, and acquisition will increasingly be driven by competitive pressures and
strategic rather than financial structuring. Technological innovation and the
translation of that innovation into market place advantage will accelerate further.
There are going to be increasing demands for sensitivity to the environment. Only total
commitment of everyone in the company will provide the level of responsibility
that will be acceptable to employees, governments, and customers.
This chagne in environment must bring in a change in the culture of successful
companies. The essence of business in the twenty-first century is going to be tapping
talent. What really matters is not so much where to locate the plants, it is how to locate
the best people and motivate them. In all this, the key word is partnership. Partnership
will be of all kinds: increasingly strategic interdependence between companies,
governments and people. Setting up in new countries will be different from what it used
to be. Once, you dropped an American off in Venezuela or Thailand with a boatload of
toothpaste and had him build a business. Now it will be necessary to establish a
partnership with local business people or local government. Simultaneously, the top-
down approach to decision-making, previously in practice, will no longer be valid. The
fundamental difficulty will be how to execute a global strategy and still allow those
leading the local entity to feel that they are controlling their own destiny. They need to
be encouraged to be entrepreneurial so that they can feel responsible for the results.
As already mentoned, this involves a shift in culture. To move towards a
winning culture it will be necessary to create what might be called a
‘boundaryless company’. The barriers between functions such as engineering
and marketing, between people based on salaries, and geographic barriers
between locations must disappear. The lines between the company and its
vendors and customers must be blurred into a smooth, fluid process, and with no
objective other than satisfying the customer and winning in the market place.
When it comes to managing people, business will need to move away from the
authoriatarian approach towards a shared decision-making appraoch. The radical change
in employee involvement will give workers responsibility in the total business process,
and a consequence will be a flattening of the organizational pyramid.
Global companies simply cannot prosper in a diverse, multicultural world unless
they reflect the diversity to some degree. It is like the Darwinian ideal that
diversity in the gene pool creates strength in and survivability of the species. A
corporation that successfully draws on the talents and abilities of all its
employees as individuals will be best positioned for success.
As companies reflect more cultural diversity, they will become more tolerant, more
willing to use differences, rather than similarities, as criteria for individual success
within the organization. Any business climate in which broadly different individuals
may succeed will be one in which the organization as a whole prospers.
332 Strategic Management
Encouraging
bii. Also Desirable but Rated Somewhat Lower
• Analytic • Loyal
• Physcially fit • Organized
• Risk-taking • Diplomatic
• Intuitive • Collaborative
biii. Desirable Characteristic Rated Lowest
• Tough • Personable
• Patient • Dignified
Conservative
c.Management Style
Visionary
Delegate authority; readily reassign or terminate individualss not
meeting targets
Maintain a lean staff and set a personal example of cost consciousness
Superb communicatior
Power
Another, widely pervasive element, influencing the decision-making process in an
oganization is the exercise of power. For the purpose of strategic analysis, power is best
understood as the extent to which individuals or group are able to persuade, induce or
coerce others into following certain courses of action. This is the mechanism by which one
set of expectations will dominate policy-making or seek compromise with others.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 333
Hierarchy provides people with formal power over others and is one method by
which senior managers influence policy. It is, however, important to remember
that this type of power has very limited effect if used in isolation.
Influence can be an important source of power and may arise from personal qualities
(the charismatic leader) or because a high level of consensus exists within the group or
company (i.e. people are willing to support the prevailing viewpoint). Indeed, there is
strong support for the view that the most important task of managers is to shape the
culture of the organization to suit its strategy. However, the extent to which an
individual or group can use his/its influence is determined by a number of other factors.
In many situations, prior commitments to principles may be quite central to the
organization’s mission. Thus a ‘no redundancy’ policy may be interpreted to counter
actions proposed by senior management (such as productivity levels).
Control of strategic resources is a major source of power within companies.
However, the relative importance of different resources will change over time and
power derived in this way can show dramatic changes. Within any one company, the
extent to which various department are seen as powerful will vary with the
company’s circumstances. Design or R & D departments may be powerful in
companies developing new products or processes. Whereas marketing people may
dominate those that are primarily concerned with developing new markets.
Knowledge/skills: Individual can derive power from their specialist knowledge or
skills. Certain individuals may be viewed as irreplaceable to the company, and some
would jealously guard this privileged position by creating a mystique around their
jobs. This can be a risky personal strategy, since others within the organization may
be either spurred to acquire the skills or to devise methods of bypassing them. The
powers of many organizations’ computer specialists were threatened by the advent
of minicomputers which provided others the means of bypassing those specialists.
Control of the environment: It is well known that events in the company’s environment
are likely to influence its performance. Hence, the more uncertain the environment, the
more likely the company to be dependent upon individuals within the organization with
334 Strategic Management
specialist knowledge of that aspect of the environment. This is particularly true when the
environment is hostile. That is probably why more than anything else, financial and
marketing managers are seen as dominant in the policy determination of a company.
Exercising discretion: This is a most significant source of power within an
organiztion and is often overlooked. Whatever the strategic decision taken, its
execution cannot be controlled in all its minutest details, and even the dynamics of
the situation change between the time a decision is taken and its implementation. It
is therefore up to the implementers to interpret and execute the particular parts of
that policy, and in doing so, use their own personal discretion. This is a major source
of power for middle management in organizations.
Internal Sources
The status of the individual or group, as indicated by position within the hierarcy,
individual salaries, and job grades of the group, reputation of the individual or group.
The claim on resources as measured by the department’s budget, or the number
of employees within the group, in particular, tends in the proportion of resources
claimed by the group. The less powerful group would invariably find its
resources eroded by the more powerful.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 335
External Sources
The status of an external party, such as a supplier. This is often indicated by the
way such a party is discussed among company employees and whether they
respond quickly to its demands.
Resource dependence can be measured directly. For example, the proportion of
the comapny’s business tied up with any one customer or supplier and the ease
with which the supplier, financier, or customer can be replaced at short notice.
Negotiating arrangements: Whether external parties are dealt with at arm’s length or
are actively involved in negotiations with the company. Thus a customer who is
invited to negotiate over the price of a contract is in a more powerful position than a
similar party that is given a fixed price on a take it or leave it basis.
Symbols are equally valuable clues, i.e. whether the management team wines
and dines some customer or supplier, or the level of person in the company who
deals with the particular supplier. The care and attention paid to correspondence
with outsiders will tend to differ from one party to another.
Social Responsibility
In the past twenty-five years or so there has been increaseing awareness and
acceptance by management of the diversity of stakeholder interests and
expectations to be accommodated. This has given rise to the notion of social
responsibility, by which is meant the acceptance by management of organization
responsibilites of a social nature, wider than the legal minimum that it is bound
to fulfill. There are a wide variety of issues that can be considered to fall under
this broad heading. These are summarized in Exhibit. 12.19.
How organizations respond to these issues varies considerably and may be
sumarized in Exhibit 12.19.
Internal Aspects External Aspects
Employee welfare Pollution control
Providing medical care, assistance with Reducing pollution below legal standards
mortgages, extended sickness leave, even if competitors are not doing so, etc.?
assistance for dependent, etc.? Product safety
Working conditions Danger arising from the careless use of
Enhanced working surroundings, social and products by consumers, etc.?
sporting clubs, above minimum safety Marketing practices
standards, etc? Curtailing advertising that promotes products
Job design which harm health (e.g. tobacco and
Designing jobs to the increased satisfaction sweets), etc.?
of workers rather than efficiency, etc. Employment
Positive discrimination in favour of minorities?
Community activity
Sponsoring local events and supporting local
good causes etc.?
Exhibit12.20:SocialResponsibility:RolesoftheFirm
Within the eight categories listed above (Exhibit 12.19) four groups of responses
may be discussed. Each of them may give rise to conflicts of objective and
policy. We briefly discuss these.
The first group is at one extreme, and its ‘only business is the business’. Its only
social responsibility is to increase profit. It would, in consequence, treat the
legal requirements regarding social responsibilites as unavoidable
hindrances. The first three categories fall in this group.
The next group is categories 4 to 7. here social responsibility is exercised in a carefuly,
selective way, an usually justified in terms of economic common sense.
Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics 337
Chapter 13
Functional Implementation – Plans and Policies
A functional strategy is the short-term game plane for a key functional area within a
company. Such strategies clarify grand strategy by providing more specific details
about how key functional areas are to be managed in the near future.
Time Horizon
The time horizon of a functional strategy is usually comparatively short. Functional
strategies identify and coordinate short-term actions, usually undertaken in a year or less.
Sears, for example, might implement a marketing strategy of increasing price discounts
and sales bonuses in its appliance division to reduce excess appliance inventory over the
next year. This functional strategy would be designed to achieve a short-range (annual)
objective that ultimately contributes to the goal of Sears’ grand strategy in its retail
division over the next five years. This shorter time horizon is critical to successfully
implementing a grand strategy for two reasons. First, it focuses functional managers’
attention on what needs to be done now to make the grand strategy work. Second, the
short-time horizon allows functional managers to recognize current conditions and adjust
to changing conditions in developing functional strategies.
Specificity
A functional strategy is more specific than a grand strategy. Functional strategies guide
functional actions taken in key parts of the company to implement grand strategy. The
grand strategy provides general direction. Functional strategies give specific guidance
Functional Implementation – Plans and Policies 339
Participants
Different people participate in strategy development at the functional and business
levels. Business strategy is the responsibility of the general manager of a business
unit. Development of functional strategy is typically delegated by the business-level
manager to principal subordinates charged with running the operating areas of the
business. The business manager must establish long-term objectives and a strategy
that corporate management feels contributes to corporate-level goals. Key operating
managers similarly establish annual objectives and operating strategies that help
accomplish business objectives and strategies. Just as business strategies and
objectives are approved through negotiation between corporate managers and
business managers, the business managers typically ratifies the annual objectives and
functional strategies developed by operating managers.
The involvement of operating managers in developing functional strategies
contributes to successful implementation because understanding of what needs to
be done to achieve annual objectives is thereby improved. And perhaps most
critical, active involvement increase commitment to the strategies developed.
It is difficult to generalize about the development of strategies across functional
areas. For example, key variables in marketing, finance, and production are
different. Furthermore, within each functional area, the importance of key
variables varies across business situations.
A key task of strategy implementation is to align or fit the activities and capabilities
of an organisation with its strategies. Strategies operate at different levels and there
has to be congruence and coordination among these strategies. Such a congruence is
the vertical fit. Then, there has to be congruence and coordination among the
different activities taking place at the same level. This is the horizontal fit.
When a lower-level strategy, such as a functional strategy, is aligned with a higher level
strategy, in this case the business strategy, then a vertical fit takes place. The vertical
340 Strategic Management
fit alone is not sufficient to integrate the strategic network. It is also essential to create to
horizontal fit at the level of individual functional strategies. What this means is that the
different functional areas of marketing, finance, operations, personnel, and information
management and all the operation activities performed in these areas should not work at
cross-purpose. There has to be an alignment among them which is the horizontal fit. In
this manner, the vertical fit leads to functional strategies and their implementation, and
the horizontal fit leads to operational implementation.
The consideration of vertical fit leads us to define functional strategies in terms
of their capability to contribute to the creation of a strategic advantage for the
oraganisation. Looked at this way, we have primarily be a function of the R & D
department, but an organisation may structure it in such a way, we have the
following types of functional strategies.
Strategic marketing management means focussing on the alignment of
marketing management within an organisation with its corporate and business
strategies to gain a strategic advantage.
Strategic financial management means focussing on the alignments of
financial management within an organisation with its corporate and business
strategies to a gain a strategic advantage.
Strategic operations management implies focussing on the alignment of
operations management within organisation with its corporate and business
strategies to gain a strategic advantage.
Strategic human resource management means focussing on the alignment
of human resource management within an organisation with its corporate and
business strategies to gain a strategic advantage.
Strategic information management means focussing on the alignment of
information management within an organisation with its corporate and business
strategies to gain a strategic advantage.
It should be noted that these are emergent areas in the discipline of management. The
literature and texts in each of these functional areas assign a definite meaning to these
terms. You might have noted that managers in the industry and business magazines and
newspapers frequently use terms, such as, marketing strategy, advertising strategy or
purchasing strategy. Several terms are also prefixed with the term ‘strategic’, for
instance, strategic procurement or strategic recruitment. You should be cautious while
using these two terms since the terms ‘strategy’ and ‘strategic’ are often used without
much discretion. In strategic management there is a definite meaning conveyed by these
terms, but in practice the usage tends to trivialise the real meaning. So, when you wish
to prefix a term such as ‘strategic’ before, say, procurement, then make sure that
strategic procurement is carried out while keeping in view the objectives and strategies
of an organisation, and it is seen as something which has a vital long-term significance
to the future of the organisation.
The consideration the horizontal fit means that there has to be an integration of
the operational activities undertaken to provide a product or service to a
customer. These have to take place in the course of operational implementation.
Functional Implementation – Plans and Policies 341
For instance, a company might have a textile division among its several business
areas. Within the textile division there might be functional areas, such as,
marketing, operations, R & D, and so on. Further, and functional area of
marketing may have subfunctions such as, product development, advertising and
sales promotion, market research and so on.
Functional strategies, defined in terms of functional plans and policies-plans or
tactics to implement business strategies, are made within the guidelines which have
been set at higher levels. Plans are formulated to select a course of action, while
policies are required to act as guidelines to those actions. Functional plans and
policies, are therefore, in the nature of the tactics which make a strategy work.
Functional managers need guidance from the corporate and business strategies in order
to make decisions. In simple terms, functional plans tell the functional managers what
has to be done, while functional policies state how the plans are to be implemented.
Glueck has suggested five reasons to show why functional plans and policies are needed.
Functional plans and policies are developed to ensure that :
The strategic decisions are implemented by all the parts of an organisation.
There is a basis available for controlling activities in the different functional
areas of a business.
The time spent by functional managers on decision-making may be reduced as
the plans laydown clearly what has to be done and the policies provide the
discretion framework within which decisions need to be taken.
Similar situations occurring in different functional areas are handled by the
functional mangers in a consistent manner.
Coordination across the different functions takes place where necessary.
The development of functional plans and policies is aimed at making the
strategies formulated at the top management level practically feasible at the
functional level. Strategies need to be segregated into viable functional plans and
policies that are compatible with each other, thereby augmenting the horizontal
fit. In this way, strategies can be implemented by the functional managers.
The process of development of functional plans and policies may range from the
formal to the informal. Larger and more complex organisations may have several
hundred policies related to every major aspect. Many of these policies could have
been formulated through a formal process and published in many manuals and
documents. Smaller organisations with simpler businesses may operate with fewer
policies, most of which could be informal and understood rather than written down.
The process of developing functional plans and policies-formal or informal is similar to
that of strategy formulation. Environmental factors relevant to each functional area will
have an impact on the choice of plans and policies. Organisational plans and policies
shall affect the choice of functional plans and policies. Finally, the actual process of
choice will be influenced by objective as well as subjective factors. Then functional
plans and policies will affect, and are affected by, the resource allocation decisions.
Functional Implementation – Plans and Policies 343
But before we move on the next section, two points have to be noted. First,
functional areas have been traditionally segregated into finance, marketing,
production and personnel. Information management has emerged as a significant
function within organisations. But not all organisations divide functional areas
traditionally-they do it on the basis of what they actually need. For instance, service
organisations will have a different of functional areas. Second, the discussion of
functional plans and policies that follows is only indicative and not exhaustive. This
is understandable because functional managers in each area would formulate plans
and policies in much greater detail than we can possibly do here. Creating plans and
policies leads to conditions where subordinate managers will know what they are
supposed to do and willingly implement the decision.
Managers create plans and policies to make the strategies work. Policies provide the
means for carrying out plans and strategic decisions. The critical element is the
ability to factor the grand strategy into plans and policies that are compatible,
workable, and not just “theoretically sound.” It is not enough for managers to decide
to change the strategy. What comes next is at least as important. How do we get
there? When? And How efficiently? A manager answers these questions by
preparing plans and policies to implement the grand strategy. For example, let us say
that the strategic choice was to diversify. Now the executive must decide what to
diversify into, where to diversify, how much money will be needed, where the
money will come from, and what changes are needed in marketing, production, and
other functions to make diversification work.
The amount of planning and policymaking in the formal sense will vary with the
size and complexity of the firm. If the firm is small, or if it is a simple business, a
few policies and plans will suffice. The plans and policies are generally understood
and verbal. Larger and more complex firms find that policies and plans on every
major aspect of the firm – marketing, finance production and operations, personnel,
and so forth-are necessary, for the competitive advantage of the large firm is its
power, not its speed. That is where the smaller firm or decentralized division excels.
The processes involved in establishing plans and policies are quite similar to those
influencing strategy formation and choice. That is, environmental factors can
influence the choices : internal polices and the power of subunits jockeying for
position play a role etc. Hence, resistance to change, conflict resolution techniques,
and coalition building will all be at play in the development of plans and policies.
Without good plans and policies managers would make the same decisions over
and over again. And different managers might choose different directions, and
this could create problems. On the other hand, plans and policies should never
be so inflexible as to prevent exceptions for good reasons. So criteria for judging
the adequacy of plans and policies developed would include the following :
Do they reflect present or desired company practices and behaviour?
Are they practical, given existing or expected situations?
Do they exist in areas critical to the firm’s success?
Are they consistent with one another, and do they reflect the timing needed to
accomplish goals?
344 Strategic Management
Retrenchment Identify product Identify plants to Reduce Eliminate or Sell plants and
lines for close on the personnel on the reduce dividends, reduce personnel
divestment-those basis of capacity basis of skills and manage cash in 1 year; cut
with low sales or utilisation. needed in the flows. dividends now.
margins. future and
seniority.
Stability Push the high- Defer plant and Invest in training Develop good Continue for
margin products equipment programs to bank relations, three years
in the line investments over improve maintain steady unless trends
$ 200,000. management dividends, and show high
skills. strengthen the opportunity.
balance sheet.
Expansion Extend and Expand plant Hire additional Increase the Evaluate market
improve product capacity to sales, R&D, and debt-equity ratio share position
lines; volume is support new production by one-third. and financial
more critical than products as workers and Consider the condition after 2
margins. necessary. managers. impact of years.
dividend policy on
cashflow needs.
Then we will return to some questions about how these are to be integrated,
since our criteria suggest that plans and policies need to be consistent, provide
for coordination, and deal with timing issues.
Specialists in each area develop plans and policies in much more breadth and
depth than we can cover here. But the list indicates the types of major questions
which need to be addressed if strategy is to be implemented effectively.
product, price, place and promotion. Exhibit 13.2 illustrates the types of questions
that operating strategies must address in terms of these four components.
Key functional strategies Typical questions that should be answered by the
functional strategy
through which the products/services flow to the final user. This component of a
marketing strategy guides decisions regarding channels (for example, single
versus multiple channels) to ensure consistency with the total marketing effort.
The promotion component of marketing strategy defines how the firm will
communicate with the target market. Functional strategy for the promotion
component should provide marketing managers with basic guides for the use and
mix of advertising, personal selling, sales promotion, and media selection. It
must be consistent with other marketing strategy components and, due to cost
requirements, closely integrated with financial strategy.
Functional strategy regarding the price component is perhaps the single most important
consideration in marketing. It directly influences demand and supply, profitability,
consumer perception, and regulatory response. The approach to pricing strategy may be
cost oriented, market oriented, or competition (industry) oriented. With a cost-oriented
approach, pricing decisions center on total cost and usually involve an acceptable
markup or target price ranges. Pricing is based on consumer demand (e.g., gasoline
pricing in a deregulated oil industry) when the approach is market oriented. With the
third approach, pricing decisions centre around those of the firm’s competitors.
Pricing and other marketing policies become particularly critical at various stages of
product development and the firm’s strategy. Price has become a primary weapon in
tactical battles to secure a market share. For example, if rapid expansion is desired
early in the development of a product, pricing may be below cost. (Of course, a
desire to attract customers through loss leaders may be another reason for selling
below cost.) Being a price leader or follower is a policy which managers need to
address. Here in particular you can see how the development of plans can be
affected by managerial values. Offensive versus defensive strategists will view a
particular pricing question differently. During periods of stable demand we would
expect prices to remain relatively fixed (perhaps adjusted for inflation). If the
strategy is retrenchment, price increases and a reduction in promotion and
distribution costs would be expected if not outright abandonment. If the firm is
retrenching out of certain areas as opposed to liquidating, an orderly withdrawal
through various “demarketing” mechanisms would be necessary.
Packaging can be an alternative competitive weapon in the strategy of the firm.
If product stability is the strategy, packing changes (e.g., toothpaste in a pump,
or shaving cream in a brush) can help expand the pace of market penetration.
Policies and plans must be made which interrelate several aspects of the strategy.
For instance, a policy of different prices for different customers (or a one-price
policy) is one which can have an impact on the product and market strategy. As
you will see later, plans and policies must also be set in relation to other aspects
of the business- for instance, price is particularly critical in relation to volume-
cost-profit conditions, which affect production and the financial condition.
Investment, use of debt financing, dividend allocation, and the firm’s leaveraging
posture. Operating strategies designed to manage working capital and short-term
assets have a more immediate focus. Exhibit 13.3 highlights some key questions
financial strategies must answer for successful implementation.
Long-term financial strategies usually guide capital acquisition in the sense that
priorities change infrequently over time. The desired level of debt versus equity versus
internal long-term financing of business activities is a common issue in capital
acquisition strategy. For example, Delta Airline has a long standing operating strategy
that seeks to minimize the level of debt in proportion to equity and internal funding of
capital needs. General Cinema Corporation has a long-standing strategy of long-term
leasing to expand its theatre and soft-drink bottling facilities. The debt-to-equity ratios
for these two firms are approximately 0.50 to 2.0, respectively. Both have similar
records of steady profitable growth over the last 20 years and represent two different yet
equally effective operating strategies for capital acquisition.
Another financial strategy of major importance is capital allocation. Growth-
oriented grand strategies generally require numerous major investments in facilities,
projects, acquisitions, and/or people. These investments cannot generally be made
immediately, nor are they desired to be. Rather, a capital allocation strategy sets
priorities and timing for these investments. This also helps manage conflicting
priorities among operating managers competing for capital resources.
Retrenchment or stability often require a financial strategy that focuses on the reallocation of
existing capital resources. This could necessitate pruning product lines, production facilities,
or personnel to be reallocated elsewhere in the firm. The overlapping careers and aspirations
of key operating managers clearly create an emotional setting. Even
348 Strategic Management
with retrenchment (perhaps even more so!), a clear operating strategy that
delineates capital allocation priorities is important for effective implementation
in a politically charged organizational setting.
Capital allocation strategy frequently includes one additional dimension-level of
capital expenditure delegated to operating managers. If a business is pursuing
rapid growth, flexibility in making capital expenditures at the operating level
may enable timely resources to an evolving market. On the other hand, capital
expenditures may be carefully controlled if retrenchment is the strategy.
Dividend management is an integral part of a firm’s internal financing. Because
dividends are paid on earnings, lower dividends increase the internal funds available
for growth, and internal financing reduces the need for external, often debt,
financing. However, stability of earnings and dividends often makes a positive
contribution to the market price of a firm’s stock. Therefore, a strategy guiding
dividend management must support the business’s posture toward equity markets.
Working capital is critical to the daily operation of the firm, and capital requirements are
directly influenced by seasonal and cyclical fluctuations, firm size, and the pattern of
receipts and disbursements. The working capital component of financial strategy is built
on an accurate projection of cash flow and must provide cash management guidelines
for conserving and rebuilding the cash balances required for daily operation.
Sources of capital are related to uses of capital. A prime example is leasing
versus buying fixed assets. A policy to lease classes of assets will change the
nature of the need for funds over time and the nature of the balance sheet. Thus
owning a building (say, the Pan Am building in Manhattan) versus leasing such
space has an impact on working capital needs and the ability to finance other
types of activities. Hence a strategy of rapid expansion, if funds are limited in
the short term, might be accomplished through leasing rather than buying. Sale-
and-leaseback arrangements became quite popular in the early 1980s because of
the favourable tax benefits associated with such policies.
Other financial policies concern the evaluation of proposals for investing incertain
projects. For instance, a “hurdle rate of return” may be specified as a policy guide
before some strategic option will be considered. Hurdle rates may differ, depending
on how risk is assessed. Another method for assessing potential investment
alternatives includes a risk-adjusted discount rate in the net present value approach.
A policy of a mix of investment risks is as useful as marketing-mix policies or
planning a maxi of basic and applied research. The investment risk mix is related to
strategic choice, of course. If expansion is the desired strategy, greater risks are
acceptable. A mix of low-risk projects only may be an indication that retrenchment
is on the horizon. In the mid-1980s, corporate treasures made increasing use of
“swap transactions” which allowed firms to trade interest rate payments and limit
some exposure to risk of interest rate fluctuation. In addition, more and more firms
sought to hedge foreign currencies as part of their financial plans.
The other area in which risk plans are needed is in the area of insurance. Corporate liability
insurance in the mid-1980s was becoming very expensive, and in some instances difficult to
get at all. Some firms were forced out of business because they did not believe they could
expose themselves to the risk of doing business without insurance.
Functional Implementation – Plans and Policies 349
Other firms chose a plan of in-house protection, but such plans require a large
resource base. Still others joined consortia to pool resources as an alternative to
traditional insurers. Another possibility is to change the nature of coverage for
catarstrophic risks and at the same time reduce or eliminate coverage for more
common risks. Choices here can affect the strategy in terms of costs of doing
business, or even lead to ultimate retrenchment (liquidation or sale).
Specific targets for current assets and cash flows are also needed for items such as
inventories (finished goods and raw materials) and accounts receivable and payable.
Policies for the desired proportion of funds tied up in these accounts and the
accounting treatment (e.g., LIFO or FIFO, or book or market value) are relevant
here, as are rules for financial disclosure based on historical or “inflation-related”
reporting. Some of these policies are mandated by SEC or other government bodies,
but managers should decide which approach provides them with the most useful
information for decision making (as opposed to which treatment makes the books
“look better”). Alternative treatments of accounting data can lead to significant
differences in the data upon which managers base their decisions.
Policies governing asset use have a direct impact on other components of strategy
and cannot be made in isolation. For example, a policy with respect to maintaining a
particular monetary value of safety stock of finished goods relates to marketing
policy regarding customer relations and the ability to deliver outputs, as well as to
production policy regarding lead times and the size of production runs. Or if an
airline is trying to enhance relations with travel agents in a new territory, then
extending the time for accounts receivable on the payment for tickets may be an
important decision affecting marketing and finance.
Financial plans also become important in particular strategic actions such as mergers or
liquidations or bankruptcies. In some cases, legal factors restrain choices. But there are
usually several options which require a financial decision as to how to best implement
the strategy. Such an option would require a policy decision or would be made in
relation to other plans associated with the desired financial structure of the business.
If a firm is divesting or liquidating, financial policies as well as other plans will
need to be specified. For instance : How urgent is it? What will the cash flow
look like? What will creditors get? Who are the potential buyers? What will be
price be? How will we lay offs people? In the early 1980s, many firms began to
alter their plans to focus on debt reduction and increasing the cash flow due to
stability strategies taken in response to disinflation.
Finally, some financial policies can have an indirect effect on strategy through
the executive compensation system. For instance, firms which use stock options
as a form of competition may ultimately change the nature of control of the
business or influence risk choices made by the executives involved. The
implications could be positive or negative, and so such outcomes should be
considered as these plans and policies are established.
Hence, some of the crucial financial questions needing implementation include :
Where will get additional funds to expand, either internally or externally?
If external expansion is desired, how and where will it be accomplished?
350 Strategic Management
Directly related to the choice of emphasis between basic research and product
development is the time orientation for these efforts mandated by R&D strategy. Should
efforts be focused on the near or the long term? The solar subsidiaries of the major oil
Functional Implementation – Plans and Policies 351
Another key area in the operations of the firm involves sources of inputs or services
important to the strategy. Choices about whom to purchase from involve more than
a simple question of cost or availability. For instance, options may exist for shipping
outputs by various forms of transportation (e.g., rail, airplane, ship). The speed of
delivery versus costs may be important in the selection of the mode as well as the
vendor. Further, whether to use one or more vendors or several sources for inputs
and services is a question of some significance. Increasing dependence on one or a
few sources may increase favourable treatment and cost savings but could come at
the expense of flexibility.
Perhaps the key strategic issue involving sourcing is the make or buy question. In many
instances, the decision is made by purchasing departments largely on the basis of the
price to buy versus the cost to make. Yet such a policy is, in effect, a strategic decision
regarding the development of competitive advantages. For instance, different financial
needs are involved in making versus buying, and these can affect the capital structure. If
quick delivery is important to the strategy, consideration must be given to the varying
reliability of suppliers versus the control over components or supplies made in-house. If
expansion strategies for new products are desired, a firm may opt for buying specialty
products to round out a line or making these itself. Of course, plant capacity, personnel
skills, and the financial condition all play a role in such a decision. Similarly, if
retrenchment is the strategic choice, cost trade-offs of making versus buying can play a
role here. Network firms have gone to extreme vertical disintegration by choosing to
eliminate control over internal production. Many use foreign suppliers as sources. In
essence, the question of vertical integration as a strategy is implicit in make-or-buy
decisions. Hence, internal and external factors as well as objectives involved in strategy
formulation should guide the establishment of policies in this area : strategic choice
should not be left to the purchasing department by default.
Here, policies such as relying on supplies within 60 miles of a plant, or shipping
finished goods immediately (instead of producing for inventory) can implement a
just-in-time approach to accomplishing aggregate manufacturing flexibility.
Similarly, personnel policies allowing the hiring of temporary or part-time workers
for operations as necessary increase flexibility and can reduce costs. Allen-Bredley
Company found that its highly automated assembly line increased flexibility, albeit
at a cost of lower output. Yet the flexibility was seen as a higher-order priority than
output, one that was essential to Allen-Bradley’s future competitive ability.
POM is a crucial functional area in implementing strategies. Traditionally, marketing
and POM have been rivals. But they must coexist and work together, and their tasks
must be coordinated through appropriate policies and plans, if any strategy is to work.
POM operating strategies must be coordinated with marketing strategy if the firm is to
succeed. Careful integration with financial strategy components (such as capital budgeting
and investment decisions) and the personnel function are also necessary Exhibit 13.6 helps
illustrate the importance of such coordination by showing the different POM concerns that
arise when different marketing/financial/personnel strategies are required as elements of
the grand strategy.
356 Strategic Management
Possible elements of strategy Concomitant conditions that may affect or place demands on the
operations function
1. Compete as low-cost provider of goods or Broadens market.
services Requires longer production runs and fewer product changes. Requires
special purpose equipment and facilities.
2. Compete as high-quality provider Often possible to obtain more profit per unit, and perhaps more total
profit from a smaller volume of sales.
Requires more quality-assurance effort and higher operating cost.
Requires more precise equipment, which is more expensive.
Requires highly skilled workers, necessitating higher wages and greater
training efforts.
3. Stress customer service Requires broader development of service people and service parts and
equipment.
Requires rapid response to customer needs or changes in customer
tastes, rapid and accurate information system, careful coordination.
Requires a higher inventory investment.
4 Provide rapid and frequent introduction of Requires versatile equipment and people.
new products Has higher research and development costs.
Has high retraining costs and high tooling and changeover in
manufacturing.
Provides lower volumes for each product and fewer opportunities for
improvements due to the learning curve.
5. Strive for absolute growth Requires accepting some projects or products with lower marginal value,
which reduces ROI.
Diverts talents to areas of weakness instead of concentrating on
strengths.
6. Seek vertical integration Enables company to control more of the process. May not have
economies of scale at some stages of process.
May require high capital investment as well as technology and skills
beyond those currently available within the organization.
7. Maintain reserve capacity for flexibility Provides ability to meet peak demands and quickly implement some
contingency plans if forecasts are too low.
Requires capital investment in idle capacity.
Provides capability to grow during the lead time normally required for
expansion.
8. Consolidate processing (centralize) Can result in economies of scale.
Can locate near one major customer or supplier.
Vulnerability : one strike, fire, or flood can hall the entire operation.
9. Disperse processing of service Can be near several market territories.
(decentralize) Requires more complex coordination network : perhaps expensive data
transmission and duplication of some personnel and equipment at each
location.
If each location produces one product in the line, then other products still
must be transported to be available at all locations.
If each location specializes in a type of component for all products, the
company is vulnerable to strike, fire flood, etc.
If each location provides total product line, then economies of scale may
not be realized.
10. Stress the use of mechanization, Requires high capital investment.
automation, robots Reduces flexibility.
May affect labor relations.
Makes maintenance more crucial.
11. Stress stability of employment Serves the security needs of employees and may develop employee
loyalty.
Helps to attract and retain highly skilled employees.
May require revision of make-or-buy decisions, use of ideal time,
inventory, and subcontractors as demand fluctuates.
are being allocated to this office, and more authority to make policies had been
granted.
Policies here have an impact on the image the organization wishes to present. But some
can also be seen as necessary to protect long-term economic interests. For example,
many firms operating in South Africa under conditions of apartheid face critical policy
questions. Thus some firms may choose to encourage employee participation in
community activities, involve themselves in political action committees (PACs), or
provide financial support for community development projects. In many instances, these
policies may be a way to ‘manage the environment.” Remember, strategies can be active
or passive. More firms these days appear to exercise active approaches to influencing
their environment to create opportunity or avert threat. In addition to involvement with
PACs the public relations staff or high-level executives will monitor the progress of
pieces of legislation in federal or state capitals. This involves watching committee
assignments for bills, noting hearing schedules for bills of interest, and determining the
action to be taken on each bill (testimony at hearings, speaking with committee
members, attending the hearing, briefing key legislators regarding the issues, etc.).
Of course, the degree to which a firm attempts to exercise “influence” requires a
policy on how far legal limits are to be stretched (e.g., should bribery be
overlooked). This is a particularly difficult problem for the international firm.
Should it behave as a change agent, or adapt to local customs? Should it follow the
adage “When in Rome do like the Home Office”? The usual prescription is to strike
a balance of constructive interaction, but this is often easier said than done.
When all line and staff functions have developed plans and policies to aid
implementation of the strategic choice, implementation is not necessarily complete.
There is a need to be sure that there is internal consistency in the policies and plans
developed for the line and staff. And these need to be related to the assessment of
the role of strengths and weaknesses as they relate to the development of
competitive advantage. Let’s consider an example to illustrate this key point.
Suppose that a furniture manufacturer pursues marketing plans calling for a narrow
product line, a low price, and broad distribution. Various policies would probably
include decentralized storage of finished goods, large-lot-size production, a low-or
medium-skilled work force, and a limited number of large-scale plants.
On the other hand, a manufacturer of high-priced, high-style furniture sold through
exclusive distributors might call for production to order, many model and style
changes, well-trained and highly paid workers and supervisors, etc. While the
operations and labor costs and policies in the second case might be seen as less
efficient and a relative weakness, nonetheless they are consistent with and effective
for the chosen strategy. If the manufacturer attempted to follow the usual
prescriptions for “efficient” production (large-scale mass production of items), it
probably would not be effective in carrying out its strategy.
As we discussed each area earlier, you may have noted that effective decisions cannot be
made without regard to their impact on other areas of the business. Otherwise,
suboptimization is likely to result. Trade-offs are generally required in this process. A
policy of minimizing the inventory may come at the expense of satisfying customers.
Exhibit 13.7 shows some of the common trade-offs occur across areas as well.
Functional Implementation – Plans and Policies 361
Hence, top executives must be involved with negotiations and policy formulation to
assure that the plans that are developed are working together to accomplish the key tasks
needed to carry out a given strategy. The extent of involvement needed relates to the
strategy itself. Consider, for instance, the need to link R& D, production, and marketing
departments. If the strategy is to develop and produce products for specific customer
needs, there will be a greater need to coordinate the activities of the three departments
than if a “push” strategy in marketing is in use (selling whatever products are developed
and produced). An example of this is Ford’s “Team Taurus. ‘Normally, the 5-years
process of creating a new automobile is sequential-product planners define a concept,
the design team takes over, and then engineering develops specifications that are passed
on to manufacturing and suppliers. Such an approach was creating problems at Ford.
The Team Taurus approach put together a group from planning, design, engineering, and
manufacturing at the beginning of the process. The group asked assembly-line workers
and suppliers for their ideas, at the same time doing extensive market research and back
engineering on competitors’ products to identify customer-desired features. Such
integration was seen as necessary if Ford was to compete with foreign automakers.
Industrial engineers
Product design/engineering Size of product line Many customer specials or few specials or
none at all
Design Stability Frozen design or many engineering change
orders.
Technological risk Use of new processes unproved by
competitors or follow-the-leader policy
Complete packaged design or design-as-
Engineering you-go approach
Use of manufacturing engineering Few or many manufacturing engineers
If the business is highly capital-intensive with high manufacturing costs, then a stronger
linkage between R& D and manufacturing is likely to be helpful for developing cost-
saving process improvements. The idea is that policies can be developed to encourage
the organization to maintain a desired liaison across units to effect the communication
and coordination needed. In some instances, specialized formal units (e.g., expediters)
may be set up in the organization to facilitate this coordination. The management
information system may be used here for coordination and control.
The timing of these plans and policies must be designed so that they mesh correctly.
For instance, a number of computer companies attempted to rush into new products
with marketing programs promising more than could be delivered. Customers were
anxiously awaiting the arrival of their new machines before production was capable
of providing the necessary output. So lead times within each area of the business
need to be considered in relation to one another before plans are implemented.
Further, some policy decisions can be made and implemented immediately (e.g.,
change from LIFO to FIFO, hire unskilled workers). Others take long lead times to
come to fruition (e.g., research and development, building new plants). For example,
Genentech had a plant whereby it would hire sales force personnel contingent on
approval of a new drug by the FDA, which takes some time.
Thus, in effect, firms create a cascade of plans and policies, with the long-range
choices affecting medium- and short-range decisions.
Strategic choice
Longer than 3 years
Long-range policies, plans,
Programs
1 to 3 years
Medium-range policies, plans,
Programs
Less than 1 year range policies, plans,
Short-
Programs
Policies also vary over time, shifting with strategic needs. One interesting
perspective sheds some light on what may be one way to determine how plans
need to change with certain strategies. Fox has shown how implementation will
vary depending on where the firm’s main product or service is in the product-
service life cycle. Exhibit 13.8 presents his framework. Of course, a multiple-
SBU firm may have a number of products, each of which is in a different stage
of development. Hence specific guidelines are subject to some question as to
their overall usefulness. Nonetheless, the exhibit does illustrate how policies can
be meshed with different demands imposed by a strategy change.
Finally, it should be remembered that if contingency planning or second-
generation planning is being used, alternative functional policies for each
contingency plan must be developed.
These and many other functional plans and policies are needed to implement the grand
strategy. Your ability to formulate these will be a good indication of your practical
ability to make the strategy work. Research suggests that the success of a firm ’s strategy
is dependent on proper implementation and balancing of resources, plans, and policies.
Functional Implementation – Plans and Policies 363
Operational Implementation
Operation implementation is the approach adopted by an organisation to achieve
operational effectiveness. This is the final aspect of strategy implementation. Operation
implementation deals with the nitty-gritties of strategy. This is time for action as this is
the stage at which the most tangible work gets done. Obviously, the scope of operation
implementation would be very wide. It would cover practically everything that is done
in an organisation. It is the major task of line managers. Just like a war is won ultimately
on the basis of ammunition and supplies rather than grand strategies alone, the success
of corporate and business strategies crucially depends on how operational
implementation is done and in what way operational effectiveness is achieved.
Porter considers operational effectiveness as necessary but not sufficient to the success
of strategy. He explains the term as “performing similar activities better than rivals
perform them. Operational effectiveness includes but is not limited to efficiency. It refers
to any number of practices that allows a company to better utilize its inputs by, for
example, reducing defects in products or developing better products faster”.
On the fundamental objects of the discipline of management has been to show
organisations ways to improve their operational effectiveness. While doing so, a number
of practices have developed over a period of time. These practices or techniques or
methods are derived from concepts, theories, and models, which, in turn, have been
sourced from management thoughts and philosophies. There has been a virtual explosion
of management philosophies, theories, and practices in the second half of the twentieth
century, and the trend continues in the twenty-first century. A majority of these
developments relate to the basic issue of improving operational effectiveness. Managers
have desperately looked for new philosophies, theories, and practices that can help them
in improving operational effectiveness. Often this search has led them to tangible results.
Sometimes, though, it has resulted in disappointment.
The scope of operational implementation and operational effectiveness is very wide.
Most of you, the readers of this text, are likely to be either students – the (aspiring
executives), or middle-level managers. You have learnt about several management
practices in the area of strategic management, and in other courses as well. The
functional area courses (such as, marketing or finance) and core courses (like,
economics or quantitative methods) deal primarily with the techniques, methods, and
practices- all meant to help organisatioans improve operational effectiveness. All these
come to the fore during the course of operational implementation. This section would,
therefore, not attempt to achieve the impossible, that is, to discuss all the practices in
operational implementation. Rather it would attempt to draw your attention to the
critical areas of operational implementation and point out some representative practices.
For discussing operational implementation, we propose to deal with operational
effectiveness in terms of 4-P’s: productivity, processes, people, and pace.
The four areas of operational effectiveness that we shall deal with here are of
productivity, process, people, and pace. By considering these we hope to cover
all the major aspects of operational implementation. All these terms are familiar
to you but we reiterate their meaning here to set the tone for further discussion.
Productivity is the measure of the relative amount of input needed to secure a given
amount of output. It is frequently expressed mathematically as the ratio of the quantity
Functional Implementation – Plans and Policies 365
of output to the quantity of input. Inputs are resources (such as finance, raw
materials, machinery and equipments, information, time or management).
Outputs are the products and services.
Processes are courses of action used for operational implementation. Processes
are often implemented through methods. These methods are systematic and orderly
procedures, and consist of sequential steps implemented in a chronological order.
The purpose of all processes is to achieve optimum utilization of resources.
People are the stakeholders in the organisation. The significant people are the
investors, employees, suppliers, customers. Among these, employees play a
direct and central role in operational implementation.
Pace is the speed of operational implementation and is measured in terms of time.
Efficiency is the parameter often used to express the pace of operational implementation.
Efficiency is the amount of work done (or performance) per unit time.
Observe that these areas of operational effectiveness are not mutually exclusive.
A practice that is chosen to achieve productivity adopts a process that is
followed by people and is executed at defined pace. What is important is the
overall effects achieved, that is, operational effectiveness. This is the reason why
horizontal fits is so important to operational implementation.
Next, we shall take up the four areas of operational effectiveness for discussion.
But let us clarify two points before we discuss these four areas.
Firstly, we said above that by taking up these four areas we hope to cover the major
aspects of operational implementation. Yet the scope of operational implementation
is so wide that other aspects may have to be included in practice. For instance,
profitability may be an aspect that matter at the level of operational implementation.
The several small activities that make up operational implementation contribute to
profitability. So some of you might feel that profitability should also be included as
an area of operational implementation.
Secondly, within one area we include practices that primarily relate to that area.
To some of you it may seem that practice we place in one area should really
belong to another area. This is understandable since the integrated nature of
operational implementation makes it possible that one practice contributes to
more that one area. For instance, a productivity practice may also contribute to
better process and it usually leads to faster pace.
The discussion that follows will primarily be in terms of the practices, techniques, and
methods used in a particular area. These practices have been proposed from time to time
by management theorists, practitioners, and consultants. Each practice is based on a set
of concepts, theorists and models. And these, in turn, are derived from management
thoughts and philosophies. Different thoughts and philosophies have dominated the
practice of management at different times. Environmental factors, to a large extent, have
been the stimuli for these practices. So, if scientific management held sway over
managements practice in the beginning of the twentieth century then the application of
information technology assumed greater importance by the close of the millennium.
Along the way, we have seen the rise and fall of management practices. We will close
this section by referring to this issue. But before we do that let us have an overview of
366 Strategic Management
Processes
Processes have an overwhelming presence in management. The term ‘management’
is defined in terms of the managerial processes of planning, organising, leading, and
controlling. Decision-making in management and strategic management are
processes too. The functional areas of marketing, finance, operations, human
resource management, and information management operate on the basic of well-
established processes. These functional areas have myriad processes, such as,
selling, marketing research, budgeting, inventory control, maintenance management,
staffing, management development, and informing processing.
368 Strategic Management
broken down and a decision taken to focus on core activities and to outsource rest of
the activities to outside agencies who can perform them more efficiently. Here too,
the vendors and suppliers are a part of the firm’s processing system and the benefits
from optimization and operational effectiveness are shared by all.
Processes, as practices for operational implementation, are significant for all types of
strategies. Since process improvement is the basic purpose of all new processes, there
are several benefits of lower cost, better quality, lesser wastage, lower production time,
and higher productivity. So processes are relevant for operational implementation of all
types of business strategies. For instance, strategic advantage results from the ability of
a company to manage its value-chain in a way that enables it to offer better customer
value, thereby making it more competitive. Also, deconstructing value-chains by using
supply-chain management and outsourcing makes it possible to offer higher
differentiation, as the firm’s own facilities are not tied down to mass manufacturing.
People
Nineteenth century management considered people as just a unit of productive labour
within and a member of the buying community outside. Operational implementation
was all about taking maximum work out of wage-earners and paying them as little as
possible. The worker management relation was the master-servant type or, at best, a
paternalistic mai-baap connection. The emergence of human relations, industrial
sociology, industrial psychology, and the ideas of human behaviour and motivation
during the period 1930 through 1960 caused a drastic change in the perception of people
as a critical resource. The transformation of labour relations to personnel management
and then to human resource management and strategic human resource management is
an indication of the change that has taken place with regard to people management.
Operational implementation with regard to people management assumes a wider scope
when strategies have to addressers an extended body of stakeholders. The coverage
includes not only the people-the employees- within but also outside, such as, the
customer, suppliers, and the society at large. The content of optional implementation,
therefore, must take into account activities related to all these stakeholders.
That people factor become a critical contributor to operational effectiveness is indicated
by a plethora of terms such as job-enrichment, empowerment, team-building,
multiskilling, knowledge-worker, human capital, intellectual capital, organizational
learning, and knowledge management related to employees. The focus of competitive
strategies and marketing has decidedly shifted in the favour of the customers. Integrative
processes, such, as supply-chain management, include suppliers as a part of the
organizational system. And issues, such as, corporate governance, ethics and values, and
social responsibility, widen the concerns of people management to adopt operational
measures to address a wider audience of stakeholders.
Here we focus on some of the major practices related to people management in
the contemporary context.
Strategic recruitment and selection encompasses manpower planning aligned with
strategic, scientific selection processes designed on the basic of psychometry to
have the right match between employee and job requirements, campus recruitment
and internet-based recruitment through job and career websites.
370 Strategic Management
Performance management includes aspects, such as, psychometry testing for placement,
carefully designed orientation programmes, flexibility in working hours, application of
behavioral sciences in designing motivational systems, building up self-directly teams,
empowerment through flatter structures, decentralization and involvement, effective
communication skills, negotiation techniques, and career planning and development.
Training and development is done through an increasing emphasis on creativity
and innovation, multiskilling, cross-cultural training, and using the principles of
organizational learning and knowledge management processes.
Performance appraisal and retention management is done through design and
application of formal performance appraisal, pay-for-performance systems that
clearly link performance with rewards, feedback systems, non-monetary
incentives, and employee stock option schemes.
Separation management is no longer considered just as retrenchment and paying
the dues stipulated under the law. Exit interviews, early retirement schemes,
sabbaticals, voluntary retirement schemes, and outplacement services are
becoming the norm as many companies are downsizing.
Besides the people within, companies are also focusing on customers through
customer survey and feedback, market research, relationship marketing, and
customer relationship management. Investors are provided with better information
through transparent disclosures and aesthetically-designed corporate annual reports.
They are also treated to special discount schemes for the company’s product and
services. Companies are becoming more socially responsive to the ultimate
stakeholder-the society-by engaging in innovative social development programmes.
Emphasis is placed on building up reputation and there is more openness and
transparency in providing better service and more information.
As can be seen, people management offers a wide scope for enhancing
operational effectiveness.
Pace
The final area that we take up for discussion is the pace. By this is meant the speed
of operational implementation. The area is important since time is now recognized
as being of essence to strategy implementation. In terms of value-chain, pace can be
seen as performing every activity faster than the rivals so that strategic advantage
results. Operational implementation makes it possible to speed up activities.
Time study was proposed by Taylor and his associates as early as 1900 in order
to analyse the sequence of production work to identify wastage and to build up
more efficient process. For most part of the early twentieth century, the
traditional techniques prevailed and several of them are still in use.
The nature of managerial work was studied by Mintzberg (1973). While researching
on how managers actually spend their time he found that they engage in bursts of
activities interspersed by interruptions. This led to a greater understanding of how
sub optimal utilisation of times takes place within organisations.
Network analysis and activity charts (1970s), successors to Gantt charts of 1901, have
been popular technique to optimize time and resource allocation by focussing on the
Functional Implementation – Plans and Policies 371
Chapter 14
Strategic Evaluation and Control
There are three primary types of organizational control: strategic control, management
control, and the operational control. Strategic control, the process of evaluating strategy,
is practiced both after strategy is formulated and after it is implemented. The
organization’s strategists evaluate strategy once it has been formulated to ascertain
whether it is appropriate to mission accomplishment and again once it has been
implemented to determine if the strategy is accomplishing its objectives.
Management control is the process of assuring that major subsystems progress towards
the accomplishment of strategic objectives is satisfactory. For example, is SBU/Product
Division A’s ROI performance acceptable? Or, is the production Department meeting its
quality control objectives? Operational control is the process of ascertaining whether
individual and work group role behaviors (performance) are congruent with individual
and work group role prescriptions. For example, is Rama reaching his sales quota?
Like the phase of planning, the types of control are not distinct entities. Rather, in
various organizations, one type of control may be almost indistinguishable from another.
Furthermore, the devices used in one type of control may also be employed in another.
For example, management control devices such as ROI may be used to measure not only
the performance of organizational components but the total organization as well. Finally,
while most operational and many management control systems may posses automatic
correction activities. The evaluation of strategy requires executive judgment.
Strategic, management, and operational control systems perform an important integrative
function. The measurement of performance as related to objective accomplishment
coordinates activity. Experience and research have revealed that any number of variables
may cause performance to be incongruent with strategy. For example, the assumptions
under which strategy was formulated may change. Or, strategy, plans, and policies may
not be adhered to. Deviations from either assumptions or guidance lead to unsatisfactory
results. Therefore, the successful strategy must have control as one of its dimensions.
What is controlled varies from level to level in the organization. The organization
strategists are responsible for strategic control, as are the stockholders, theoretically.
Management control is principally the function of top management, especially the
CEO. Operational control is primarily the concern lower-level managers. Strategic
control and management control are concerned with perspectives broader than the
details dealt with in operational control. Note, however, that “war” rooms and
strategic information systems allow top management to view the details of
operations if necessary. While much of what follows is related to formal control
systems, informal control systems may suffice in the smaller organization, especially
for operational control where personal observation is possible.
374 Strategic Management
This model focuses on results (output). In fact, most control systems- strategic,
management, or operational- focus on results. Often, the consequence of utilizing
these feedback control systems is that the unsatisfactory performance continues until
the malfunctioning is discovered. One technique for reducing the problems
associated with feedback control system is “feedforward control”. First suggested by
Harold Koontz and Robert W. Bradspies, feedforward control focuses on the inputs
to the system and attempts to anticipate problems with outputs (see exhibit 14.1)
With respect to strategy and planning, feedforward control has wide applicability. For
example, the feedforward principle underlies the concept of simulation modeling. “What if”
question are, after all, examinations of hypothesized inputs to determine resultant effects on
system outputs. Simulations of performance can be made in any number of Strategic
situations to test for changes in basic assumptions. In fact, any situation with identifiable
inputs which can be modeled can and should utilize the feedforward approach.
Strategic Evaluation and Control 375
Once strategy has been formulated, it should be evaluated. Several criteria for
evaluation have been suggested. The best known of these, the Tilles model, can
be summarized as follows :
Is the strategy internally consistent- for example, is it consistent with mission
and consistent among its own plans?
Is it consistent with the environment?
Is it consistent with internal resources?
Does it have an appropriate amount of risk?
Does it have a proper time horizon?
Is it workable?
E.P. Learned and others, building on the Tilles model, suggest that the
following are also proper evaluative questions:
Is it identifiable? Has it been clearly and consistently identified and are people
aware of it?
Is it appropriate to the personal values and aspirations of key managers?
Does it constitute a clear stimulus to organizational efforts and commitment?
Is it socially responsible?
Are there early indications of the responsiveness of market segments to the
strategy?
J. Argenti adds:
Does it rely on weaknesses or do anything to reduce them?
Does it exploit major opportunities?
Does it avoid, reduce, or mitigate the major threats? If not, are there adequate
contingency plans?
Intuitively, these questions seem sound. More importantly, they relate directly to the
strategic management process model. In fact, these questions, when considered in
total, comprise a checklist to determine if the strategic management process model
has been properly followed. All these questions can be applied as the strategy
progresses through its various stages, including implementation. Progress and
changes can thus be observed. Specific standards of performance are established by
the strategic objectives of the master strategy and subsequent component objectives.
Once implement occurs, measurements will be taken to determine if the
objectives have been reached. The tolerances established in Step 2 of the six-
step feed back model vary from firm to firm. Tolerances are primarily
judgmental- they tell how much deviation from the standard management can
live with. Corrective and preventive action may require that strategy be changed.
Management control becomes a distinct concern when decentralization occurs. Where
management control is imposed, it functions within the framework established by the
strategy. Management control focuses on the accomplishment of the objectives of the
376 Strategic Management
various substrategies comprising the master strategy and the accomplishment of the
objectives of the intermediate plans. Normally these objectives (standards) are
established for major subsystems within the organization. Such as SBUs, projects,
products, functions, and responsibility centers. Allowable tolerances vary from
organization to organization. Typical management control measures include ROI,
residual income, cost, product quality, efficiency measures, and so forth. These
control measures are essentially summations of operational control measures. When
corrective or preventive action is taken, it may involve very minor or very major
changes in the strategy. Often, top management strategists may be removed from
their positions as the consequence of poor performing as indicated by these control
measures. One large firm has a policy for its Europeon operating division managers:
“Two consecutive quarters of declining ROI and you’re fired!” Often, critical
decisions for a company’s future result from rather imperfect control information.
Operational control systems are designed to ensure that day-to-day actions are
consistent with established plans and objectives. Operational control is concerned
with individual and group role performance as compared with the individual and
group role prescriptions required by organizational plans. Such control systems are
normally concerned with the past (unless feedforward systems are being utilized).
Operational control focuses on events in a recent period. Operations control systems
are derived from the requirements of the management control system. Specific
standards for performance are derived from the objectives of the operating plans,
which are based on intermediate plans, which are based on strategy. Performance is
compared against objectives at the individual and group levels. Corrective or
preventive action is taken where performance does not meet standards. This action
may involve training, motivation, leadership, discipline, or termination.
It is important to know who the participants are and what role they will play in strategic
evaluation and control. This will answer the question: who evaluates the strategy and
how do they do it? Going beyond the role of evaluators, we are also interested in
knowing who the appraisers are and how they help in strategic evaluation.
The various participants in strategic evaluation and control and their respective
roles are described below.
Theoretically, every organisation is ultimately responsible to its shareholders-lenders
and the public in the case of private companies, and the government in the public
sector companies. The role of shareholders, in practice, however, is limited. This is
specially true of the general public where the individual holding is too small to be of
any effective value in strategic evaluation. Lenders such as financial institutions and
banks which have an equity stake are typically concerned about the security and
returns on their shareholding rather than in the long-term assessment of strategic
success. The government, through its different agencies, does play a significant role
in the strategic evaluation and control of public sector companies.
The Board of Directors enacts the formal role of reviewing and screening executive
decision in the light of their environmental, business and organisational implications. In
this way, the board is required to perform the functions of strategic evaluation in more
generalized terms. But there is a lot of variation among Indian companies in the way in
which the Board may perform its control functions. In some companies, the Board may
Strategic Evaluation and Control 377
have the real authority to oversee strategic evaluation, while in other companies
its authority may be usurped by other like chief executive or a higher de facto
authority, such as the family council, in the case of family-owned companies, the
headquarters in the case of MNC subsidiaries, or the controlling ministry in the
case of public sector companies.
Chief executives are ultimately responsible for all the administrative aspects of strategic
evaluation and control. Ideally, a chief executive should not sit in judgement over the
performance of the organisation under his or her control. Rather, the chief executive
should be evaluated on the basis of his/her performance. This leads to the question that
who should evaluate the chief executive. Normally, the evaluation of a person should be
done by an individual or a group to whom he reports. In cases where the chief executive
is accountable to no one in particular (this is possible in the case of an entrepreneurial
organisation), it is difficult to allocate this responsibility apart from relying on self-
evaluation. But in the other cases, the ownership pattern can determine who should
evaluate the chief executive. Thus, the family council in family-owned companies and
majority shareholders in other cases could evaluate a chief executive’s performance.
The SBU or profit-centre heads may be involved in performance evaluation at
their levels and may facilitate evaluation by corporate-level executives.
Financial controllers, company secretaries, and external and internal auditors
form the group of persons who are primarily responsible for operational control
based on financial analysis, budgeting, and reporting.
Audit and executive committees, setup by the Board of the chief executive, may be
charged with responsibility of continuous screening of performance. The corporate
planning staff or department may also be involved in strategic evaluation.
Middle-level managers may participate in strategic evaluations and control as providers
of information and feedback, and as the recipients of directions from above, to take
corrective actions. While evaluating organisational units one cannot avoid relying on the
performance evaluation of individuals. This creates certain barriers in strategic
evaluation and control. We would point out five major types of barriers in evaluation:
the limits of control, difficulties in measurement, resistance to evaluation, tendency to
rely on short-term assessment, and relying on efficiency versus effectiveness.
Limits of control: By its very nature, any control mechanism presents the
dilemma of too much versus too little control. It is never an easy task for
strategists to decide the limits of control. Too much control may impair the
ability of managers, adversely affect initiative and creativity, and create
unnecessary impediments to efficient performance. On the other hand, too less
control may make the strategic evaluation process ineffective and redundant.
Difficulties in measurement: The process of evaluation is fraught with the danger
of difficulties in measurement. These mainly relate to the reliability and validity of the
measurement techniques used for evaluation, lack of quantifiable objectives or
performance standards, and the inability of the information system to provide timely and
valid information. The control system may be distorted and may not evaluate uniformly
or may measure attributes which are not intended to be evaluated.
378 Strategic Management
Strategic Controls
Control of strategy can be characterized as a form of “steering control”. Ordinarily,
a significant time span occurs between initial implementation of a strategy and
achievements of its intended results. During that time, numerous projects are
undertaken, investments are made, and actions are undertaken to implement the new
strategy. Also during that time, both the environmental situation and the firm’s
internal situation are developing and evolving. Strategic controls are necessary to
steer the firm through these events. They must provide the basis for correcting the
actions and directions of the firm in implementing its strategy as developments and
changes in its environmental and internal situations take place.
Prudential Insurance Company provides a useful example of the proactive, steering
nature of strategic control. Several years ago, Prudential committed to a long-term
market development strategy wherein it would seek to attain the top position in the life
insurance industry by differentiating its level of service from other competitors in the
industry. Prudential decided to establish regional home offices, thus achieving a
differential service advantages. Exercising strategic control, prudential managers used
the experience at the first regional offices to reproject overall expenses and income
associated with this strategy. In fact, the predicted expenses were so high that the
location and original schedule for converting other regions had to be modified.
Conversion of corporate headquarters was sharply revised on the basic of the other early
feedback. Thus the steering control (strategic control) exercised by Prudential managers
significantly altered the strategy long before the total plan was in place. In this case,
major objectives remained in place while changes were made in the strategy; in other
cases, strategic controls may initiate changes in objectives as well.
The four basic types of strategic controls are:
Premise control
Implementation control
Strategic surveillance
Special alert control.
The nature of these four strategic controls in summarized in exhibit 14.2.
Premise Control
Every strategy is based on assumed or predicted conditions. These assumptions or
predictions are planning premises; a firm’s strategy is designed around these predicted
conditions. Premise control is designed to check systematically and continuously
whether or not the premises set during the planning and implementation process are still
valid. If a vital premise is no longer valid, then the strategy may have to be changed.
The sooner an invalid premise can be recognized and revised, the better the chances that
an acceptable shift in the strategy can be devised.
Premises are primarily concerned with two types of factors: environmental and industry.
They are described below.
A company has little or no control over environmental factors, but these factors exercised
considerable influence over the success of the strategy. Inflation, technology, interest
380 Strategic Management
Strategic surveillance
Premise control
Implementation control
Time 2 Time 3
The key premises should be identified during the planning process. The premises
should be recorded, and responsibility for monitoring them should be assigned to the
persons or departments who are qualified sources of information. For example, the
sales force may be a valuable source for monitoring the expected price policy of
major competitors, while the finance department might monitor interest rate trends.
All premises should be placed on key success premise so as to avoid information
overload. Premises should be update (new predictions) based on update information.
Finally, key areas within the company or key aspects of the strategy that the
predicted changes may significant impact should be pre-identified so that
adjustments necessitated by a revised premise can be determined and initiated. For
example, senior marketing executives should be alerted about changes in
competitors’ pricing policies in order to determine if revised pricing, product
repositioning or other strategy adjustments are necessary.
Implementation Control
The action phase of strategic management is located in the series of steps, programs,
investments, and moves undertaken over a period of time to implement the strategy.
Special programs are undertaken. Functional areas initiate several strategy-related
activities. Key people are added or reassigned. Resources are mobilized. In other words,
managers convert broad strategic plans into concrete actions and results for specific
units and individuals as they go about implementing strategy. And these actions take
Strategic Evaluation and Control 381
management to withdraw, in spite of high sunk costs, pride, and patriotism. Only an
objective, full-scale strategy reassessment could have led to such a decision. In this
example, a major resource allocation decision point provided the appropriate point
for a milestone review. Milestone reviews might also occur concurrent with the
timing of a new major step in the strategy’s implementation or when a key
uncertainty is resolved. Sometimes managers may even set an arbitrary time period,
say, two years, as a milestone review point. Whatever the basis for selecting the
milestone point, the critical purpose of a milestone review is to undertake a thorough
review of the firm’s strategy so as to control the company’s future.
Strategic Surveillance
By their nature, premise control and implementation control are focused control. The
third type of strategic control, strategic surveillance, is designed to monitor a broad
range of events inside and outside the company that are likely to threaten the course or
the firm’s strategy.The basic idea behind strategic surveillance is that some form of
general monitoring of multiple information sources should be encouraged, with the
specific intent being the opportunity to uncover important yet unanticipated information.
Strategic surveillance must be kept unfocused as much as possible and should be
designed as a loose “environmental-scanning” activity. Trade magazines, The Wall
Street Journal, trade conferences, conversations, and intended and unintended
observations are all sources of strategic surveillance. While strategic surveillance is
loose, its important purpose is to provide an ongoing, broad-based vigilance in all daily
operations so as to uncover information that may prove relevent to firm’s strategy.
Strategic controls are useful to top management in monitoring and steering the
basic strategic direction of the company. But operating managers also need
control methods appropriate to their level of strategy implementation. The
primary concern at the operating level is allocation of the company’s resources.
Types of strategic control
Basic Premise control Implementation Strategic Special alerts
characteristics control surveillance
Objects of control Planning premises Key strategic thrusts Potential threats and Occurrence of
and projections and milestones opportunities related recognizable but
to the strategy unlikely events
Degree of focusing High High Low High
Data acquisition:
Formalization Medium High Low High
Centralization Low Medium Low High
Use with:
Environmental factors Yes Seldom Yes Yes
Industry factors Yes Seldom Yes Yes
Strategy-specific No Yes Seldom Yes
factors
Company-specific No Yes Seldom Seldom
factors
strategic group is a group or firms that adopts similar strategies with similar
resources. Firms within a strategic group,often within the same industry, and
sometimes in other industries too, tend to adopt similar strategies.
Strategic leap control: Where the environment is relatively unstable, organisations
are required to make strategic leaps in order to make significant changes. Strategic leap
control can assist such organisations by helping to define the new strategic requirements
and to cope with emerging environmenal realities. There are four techniques or
evaluation used to exercise strategic leap control: strategic issue management,
strategic field analysis, systems modelling and scenarios.
Strategic issue management is aimed at identifying one or more strategic
issues and assessing their impact on the oraganisation. A strategic issue is a
forthcoming development, either inside or the organisation, which is likely
to have an important impact on the ability of the enterprise to meet its
objectives. By managing on the basis of strategic isssues, the strategists
can aviod being overtaken by surprising environmental changes and design
contingency plans to shift strategies whenever required.
2. Strategic field analysis is a way of examining the nature and extent of
synergies that exist or are lacking between the components of an
oraganisation. Whenever synergies exist the strategists can assess the ability
of the firm to take advantage of thoes. Alternativly, the strategists can evaluate
the firm’s ability to generate synergies where they do not exist.
3. Systems modelling is based on computer-based models that simulate the essential
features of the organisation and its environment. Through systems modelling,
organisations may exercise pre-action control by assessing the impact of the
environment on organisation because of the adoption of a particular strategy.
Scenarios are perceptions about the likely environment a firm would face in the
future. Its use could be extended to evaluation by enabling organisations to
focus strategies on the basis of forthcoming developments in the environment.
Several of the above techniques for strategic control—with the possible exception of
responsibility centres-are or a relatively recent origin. The development of these
techniques is an evidence of the expanding body of knowledge in strategic management.
As the use and application of strategic management gains approval, it is quite likely that
organisations would start using such techniques. Operational control, however, uses
more familiar techniques which have traditionally been used by strategists. In the next
part of this section, we look at techniques for operational control.
segregate the total tasks of a firm into identifiable activities which can then
be evaluated for effectiveness.
Quantitative analysis takes up the financial parameters and the non-financial
quantitative parameters, such as, physical units or time, in order to assess
performance. The obvious benefit of using quantitative factors (either financial or
physical parameters) is the ease of evaluation and the verifiability of the
assessment done. These are probably the most- used methods for evaluation for
operational control. Among the scores of financial techniques described in all
standard texts in the area of finance are traditional techniques, such as, ratio
analysis, or newer techniques, such as, economic value-added(EVA) and its
variations, and activity-based costing (ABC). These are proven methods so far as
their efficacy for evaluating operational effectiveness is concerned. Apart from the
financial quantitative techniques, there are several non-financial quantitative
techniques available for the evaluation for operational control, such as:
computation of absenteeism, market ranking, rate of advertising recall, total cycle
time of production, service call rate, or number of patents registered per period.
Many more techniques can be evolved by firms to suit their specific requirement.
Qualitative analysis supplements the quantitative analysis by including those aspects
which is not feasible to measure on the basis of figures and numbers. The methods
that could be used for qualitative analysis are based on intuition, judgement, and
informed opinion. Techniques like surveys and experimentation can be used for
the evaluation of performance for exercising operational control.
Comparative analysis: This consists of historical analysis, industry norms,
and benchmarking. It compares the performance of a firm with its own past
performance, or with other firms.
Historical analysis is a frequently used method for comparing the performance of a
firm over a given period of time. This method has the added benefit of enabling a
firm to note how the performance has taken place over a period of time and to
analyse the trend or pattern. Such an analysis can offer the firm a better perception
of its performance as compared to an absolute assessment.
Industry norms is a comparative method for analysing performance that has the
advantage of making a firm competitive in comparison to its peers in the
same industry. Being a comparative assessment, evaluation on the basis of
industry norms enables a firm to bring its performance at least up to the
level of other firms and then attempt to surpass it.
Benchmarking is a comparative method where a firm finds practices in an area and
then attempts to bring its own performance in that area in line with the best
practice. Best practices are the benchmarks that should be adopted by a firm as
the standards to exercise operational control. Through this method,
performance can be evaluated continually till it reaches the best practice level.
In order to excel, a firm shall have to exceed the benchmarks. In this manner,
benchmarking offers firms a tangible method to evaluate performance.
Comprehensive analysis: This includes balanced scorecard and key factor
rating. His analysis adopts a total approach rather than focussing on one area of
activity, or a function or department.
386 Strategic Management
time period (usually five years or more), operational controls provide post-action
evaluation and control over short time periods ¾usually from one month to one
year. To be effective, operational control systems must take four steps common
to all post-action controls:
Set standards of performance.
Measure actual performance.
Identify deviations from standards.
Initiate corrective action or adjustment.
Budgeting Systems
The budgetary process was the forerunner of strategic planning. Capital budgeting in
particular provided the means for strategic resource allocations. With the growing use of
strategic management, such allocations are now based on strategic assessment and priorities,
not solely on capital budgeting. Yet capital and expenditure budgeting, as well as sales
budgeting, remain important control mechanisms in strategy implementation.
A budget is simply a resource allocation plan that helps managers coordinate
operations and facilitates managerial control of performance. Budgets
themselves do not control anything. Rather, they set standards against which
action can be measured. They also provide a basis for negotiating short-term
resource requirements to implement strategy at the operating level.
Most firms employ a budgeting system, not a singular budget, in controlling
strategy implementation. Exhibit 14.4 represents a typical budgeting system for
a manufacturing business. A budgeting system incorporates a series of different
budgets fitting the organisation’s unique characteristics. Because organizations
differ, so do their budgets. Yet most firms include three general types of budgets-
revenue, capital, and expenditure-in their budgetary control system.
Revenue Budgets: Most firms employ some form of revenue budget to monitor their
sales projections (or expectations), because this reflects a key objective of the chosen
strategy. The revenue budget provides important information for the daily management
of financial resources and key feedback as to whether the strategy is working. For
evaluative purposes, the revenue budget may be derived from revenue forecasts arrived
at in the planning process, or it may be linked to past revenue patterns. For example,
most hotel/motel operators emphasize daily revenue compared to revenue for the same
day in the previous year as a monitor of sales effectiveness.
A revenue budget is particularly important as a tool for control of strategy
implementation. Revenue budgets provide an early warning system about the
effectiveness of the firm’s strategy. And if the deviation is considerably below or
above expectations, this budgetary tool should initiate managerial action to
reevaluate and possibly adjust the firm’s operational or strategic posture.
Capital Budgets: Capital budgets outline specific expenditures for plant, equipment,
machinery, inventories, and other capital items needed during the budget period.
To support their strategies, many firms require capital investment or divestiture. A firm
committed to a strong growth strategy may need additional capacity or facilities to
388 Strategic Management
support increased sales. On the other hand, a firm intent on retrenchment may
have to divest major parts of its current operations to generate additional
resources. In both cases, the firm is concerned with management of significant
financial resources, probably over an extended time period.
For effective control, a capital budget that carefully plans the acquisition and
expenditure of funds, as well as the timing, is essential.
Two additional budgets are often developed to control the use of capital resources. A
cash budget forecasts receipts and disbursements of cash-cash flow-during the
budget period. And a balance sheet budget is usually developed to forecast the
status of assets, liabilities, and net worth at the end of the budget period.
Expenditure Budgets. Numerous expense/cost budgets will be necessary for
budgetary control in implementation of strategy in various operating units of the
firm. An expenditure budget for each functional unit and for sub-functional activities
can guide and control unit/individual execution of strategy, thus increasing the
likelihood of profitable performance. For example, a firm might have an expenditure
budget for the marketing department and another for advertising activities.
In such budgets, Rs./dollar variables will be the predominant measure, although
nondollar/ Rs. measures of physical activity levels may occasionally be used as a
supplement. For example, a production budget might include standards for
expenditures as well as standards for output level or productivity. These non-
dollar/Rs. variables might also include targets or milestones that provide
evidence of necessary progress in particular strategic programs.
An expenditure or operating budget is meant to provide concrete standards against
which operational costs and activities can be measured and, if necessary, adjusted to
maintain effective strategy execution. The expenditure budget is perhaps the most
common budgetary tool in strategy implementation. If its standards are soundly
linked to strategic objectives, then it can provide an effective communication link
between top management and operating managers about what is necessary for a
strategy to succeed. It provides another warning system alerting management to
problems in the implementation of the firm’s strategy.
The budgeting system Exhibit 14.4 provides an integrated picture of the firm’s
operation as a whole. The effect on overall performance of a production decision
to alter the level of work-in-process inventories or of a marketing decision to
change sales organisation procedures can be traced through the entire budget
system. Thus, coordinating these decisions becomes an important consideration
for the control of strategy implementation.
Exhibit 14.4 provides and illustration of how budgets can be coordinated to aid in
coordinating operations. In this chart, production, raw material purchases, and direct
labor requirements are coordinated with anticipated sales. In more comprehensive
systems, other budgets may be included : manufacturing expense, inventories, building
services, advertising, maintenance, cash flow administrative overhead, and so on,
Strategic Evaluation and Control 389
Capital- Capital
investment budget
requirement
evaluate and
which are broken down into
adjust overall expense and cost goals
Expenditure budgets
and schedules
Budgets and schedules in
Scheduling
Timing is often a key factor in the success of a strategy. Schedule is simply a planning
tool for allocating the use of a time-constrained resource or arranging the sequence of
interdependent activities. The success of strategy implementation is quite dependent on
both. So scheduling offers a mechanism with which to plan for, monitor, and control
these dependencies. For example, a firm committed to a vertical integration strategy
must carefully absorb expanded operations into its existing core. Such expansion,
whether involving forward or backward integration, will require numerous changes in
the operational practices of some of the firm’s organizational units. A good illustration
of this is Coors Brewery, which recently made the decision to integrate backward by
producing its own beer cans. A comprehensive, two-year schedule of actions and targets
for incorporating manufacture of beer cans and bottles into the product chain
contributed to the success of this strategy. Major changes in purchasing, production
scheduling, machinery, and production systems were but a few of the critical operating
areas that Coors’ scheduling efforts were meant to accommodate and control.
390 Strategic Management
Management’s concern is comparing progress to date with expected progress at this point in
the plan. Of particular interest is the current deviation because it provides a basis for
examining suggested actions (usually from subordinate managers) and for finalizing
decisions on any necessary changes or adjustments in the company’s operations.
In Exhibit 14.5, the company appears to be maintaining control of its cost structure.
Indeed, it is ahead of schedule on reducing overhead. The company is well ahead of its
delivery cycle target, while slightly below its service/sales personnel ratio objective.
Product returns look OK, although product performance against specification is below
standard. Sales per employee and expansion of the product line are ahead of schedule.
Absenteeism in the service area is meeting projections, but turnover is higher than
392 Strategic Management
averages, which, by definition, ignore variability. These difficulties suggest the need for
definition acceptable ranges of deviation in budgetary figures or key indicators of
strategic success. This approach helps in avoiding administrative difficulties,
recognizing measurement variability, delegating more realistic authority to operating
managers in making short-term decisions, and hopeful improves motivation.
Some companies use trigger point for clarification of standards, particularly in
monitoring key success factors. A trigger point is a level of deviation of a key indicator
or figure (such as a competitor’s actions or a critical cost category) that management
identifies in the planning process as representing either a major threat or an unusual
opportunity. When that point is “hit,” management is immediately alerted (“triggered”)
to consider necessary adjustments in the firm’s strategy. Some companies take this idea
a major step forward and develop one or more contingency plans to be implemented
once predetermined trigger points are reached. These contingency plans redirect
priorities and actions rapidly so that valuable reaction time is not “wasted’ on
administrative assessment and deliberation of the extreme deviation.
Correcting deviations in performance brings the entire management task into focus.
Managers can correct performance by changing measures. Perhaps deviations can be
resolved by changing plans. Management can eliminate poor performance by changing
how things are done, by hiring new people, by retaining present workers, by changing
job assignments, and so on. Correcting deviations from plans, therefore, can involve all
of the functions, tasks, and responsibilities of operations managers. Operational control
systems are intended to provide essential feedback so that company managers can make
the necessary decisions and adjustments to implement the current strategy.
Ratio Analysis
Ratios of financial statement items (here, balance sheets and income statements) are
widely used to measure strategic and management performance. With the exception
of the current and quick ratios, few generally acceptable and appropriate ratio values
exist. The exact number of ratios to use (Exhibit 14.6) the circumstances in which to
use them, their components, and their exact meanings are often not agreed upon.
Every financial analyst seems to have a preferred system.
The major problem with using these sources is finding the exact industry or
group of firms against which to compare the subject firm. While data on large
organization is abundant, the multiplicity and diversity of products among firms
makes comparisons suspect. Data on intermediate-sized firms is virtually
nonexistent. Even where comparative ratios are available, they must be used
with caution. Financial statement information is subject to varying accounting
practices which hamper comparisons. Footnotes to these statements often make
significant differences as to the true value of certain items.
Standard cost centers are those for which standard costs can be computed. By
multiplying this cost times units, an output measure is devised.
Revenue centers are those for which revenues can be determined.
Discretionary expense centers are organizational units, normally staff units,
whose output is not commonly measured in financial terms.
Profit centers are subsystems for which both costs and revenues can be measured
and where responsibility for the difference-profit-has been assigned.
Investment centers are profit centers for which the assets employed in obtaining
profit are identified. (These are SBUs or major project divisions.)
ROI (net income divided by total assets) is the performance measure most frequently
used for the last of these responsibility centers - the investment center. ROI is a
critical issue in large organizations. Inappropriate division control systems reduce
executive motivation. This can and usually does result in reduced profits. Indeed,
while ROI analysis has several advantages, it also has several limitations.
Advantages of ROI analysis include the following :
Ratio Formula for Calculation Calculation Industry Evaluation
Average
700,000
Liquidity: Current assets Rs = 2.3 times 2.5 times Satisfactory
Current Current liabilities 300,00
Quick, or acid test Current assets - Inventory 400,000 = 1.3 times 1.0 times Good
Current Liabilities 300,00
Leverage: Total debt 1,000.000 = 50 percent 33 per cent Poor
Debt to total assets Total assets 2,000,000
Times interest Pr ofit beforetaxesplusint erest ch arg es 245,000 = 5.4 times 8.0 times Fair
earned Interestchanges 45,000
273.000
Fixed charge Incomeavailablefor meetingfixed ch arges = 3.7 times 5.5 times Poor
coverage Fixed ch arges 73,000
It provides an incentive to acquire new assets only when such acquisition would
increase the return.
Limitations of ROI analysis include the following:
ROI is very sensitive to depreciation policy. Depreciation write-off variances among
divisions affect ROI performance. Accelerated depreciation techniques reduce
ROI, conflicting with capital budgeting discounted cash flow analysis.
ROI is sensitive to book value. Older plants with more depreciated assets and lower
initial costs have relatively lower investment bases than newer plants (note also
the effect of inflation on raising costs of newer plants and on the distortion of
replacement costs), thus causing ROI to be increased. Asset investment may be
held down or assets disposed of in order to increase ROI performance.
In many firms that use ROI, one division sells to another. As a result, transfer pricing
must occur. Expenses incurred affect profit. Since in theory the transfer price
should be based on total impact on firm profit, some investment center managers
are bound to suffer, Equitable transfer prices are difficult to determine.
If one division operates in an industry with favourable conditions and another in
an industry with unfavourable conditions, one will automatically “look”
better than the other.
Logistics
Inventory
Purchasing
Distribution
Marketing Management Production R&D
Growth 3M
Personnel
Promotion
Sales Cost, Motivation,
Market Share
Leadership
Differential Advantage 12M Communication
Price Labor Relations
Quality Net Income Cost of
Goods Sold 2.58M
Market Reserch
Cost of Sales
Competitive 3M
Environment Taxes .08M
Depreciation .1M
ROI
Other 0
Master
income
Strategy
6%
Cash .05M
Social/
Government 3M
Inventory .35M
Acceptability
Sales .7M
Working Accounts
Capital .3M
Turnover Receivable
1.5 Marketabl 0
Total
Overall Factors Assets e
Planning
Management Philosophy Fixed
2M Assets
Organization Structure
Location
1.3M
Asset Capital
Management Budgeting
The time span of concern is short range. The performance of division managers
should be measured in the long run. This is top management’s time span
capacity-how long it takes for their performance to realize results.
The business cycle strongly affects ROI performance, often despite managerial
performance.
Despite these criticisms, ROI will likely continue as the leading index of
management performance if for no other reason than its simplicity. Importantly,
though, ROI must be supplemented with other decision information.
ROI is an important concept in terms of both total organizational control and
subsystem control. As noted, it is the most widely used measure of a firm’s
operating efficiency. While ROI represents net income as a percentage of total
assets, it is a function of many variables ROI results from two key factors, profit
margin on sales and assets turnover.
Management Audits
One of the major questions confronting organization today is how to evaluate the
performance of the top management team. In order for this end to be achieved,
several factors must be considered:
Did top management accomplish the objectives it established?
How good were the objective it established? How good were the strategies it
employed to accomplish these objectives?
What factors beyond the control of top management affected its performance?
How well has it responded to and how well has it anticipated these factors?
These questions are operational control criteria for top management. Note, it is
strategy that is at issue.
Several systems have attempted to measure top management’s performance. One
of the more promising is the management audit which examines all facets of
organizational activity.
The audit has been widely used in many or the largest corporations and in smaller
firms as well. Importantly, the audit can be adapted to organizations with missions
other than profit, such as commonweal, service, and mutual benefit organizations.
Although management audit activity has seemed to decline in recent years, several
additional approaches to the management audit have been suggested. Of interest is
Greenwood’s management audit. He suggests that a management audit should examine.
Strategy and strategy determinants, especially environmental factors.
The major functional activities of a firm-marketing, operations (production),
personnel, and accounting and finance.
Whether managers are performing the major functions of management-planning,
organizing, staffing, directing, and controlling.
Strategic Evaluation and Control 397
Finally, Greenwood recognizes the need for an annual organization policy audit.
In this audit Greenwood has followed a management theory approach more
traditional than Martindell’s.
Management audits may also follow a format parallel to the content of the
master strategy. Such an analysis is divided into four major parts: those for
enterprise, corporate, business, and functional strategies. This approach includes
recognition of product divisions but examines strategy on the basis of functional
activities within divisions if they exist.
In observing any technique, it is important to note its weaknesses. While the
strength of the management audit is that it often has been able to successfully
predict corporate performance, it is not always accurate. Such audits have
predicted success for some companies that failed miserably. Why? First, and
probably most important at this time, the environment may change drastically.
Regardless of its weaknesses, the audit serves an important function in its
comprehensive examination of the organization. While examination of the “bottom
line” indicates problems, the auditing of other areas is vital in explaining the causes
of these problems. The audit is primarily effective because it looks beyond financial
information and systematically appraises the performance of top management.
Ultimately the aim is to determine the social impact of the firm on its stakeholders.
While some social areas are readily definable, a quantitative measure of both
requirements and performance for many of these areas is extremely difficult, if not
impossible, to obtain. Furthermore, it is difficult to obtain agreement as to exactly what
business should accomplish. Each pressure group seems to have its own set of demands.
Obviously, business cannot respond to all of them. Many corporations have audited their
activities in several of the social responsibility areas, and the scoring systems which
have been used are becoming more quantitatively oriented. The process of strategic
evaluation and control does into operate in isolation; it works on the basis of the
different organisational systems that are used to implement strategies. Here, we shall
briefly review the role of organisational systems in evaluation.
Information System
Evaluation is done by comparing actual performance with standards. The
measurement of performance is done on the basis of reports generated through the
information system. In fact that purpose of information management system is to
enable mangers to keep track of performance through control reports. Several of the
techniques described in the previous section, whether for strategic surveillance of
financial analysis, are based on the use of an information system to provide relevant
and timely data to managers to allow them to evaluate performance and strategy, and
initiate corrective action. In fact, with the increasing sophistication of the
information management systems and the use of IT it is possible to devise elaborate
methods for evaluation. Techniques such as data warehousing and datamining enable
organisations to delve deeper into their internal systems and come up with
information that can be useful for evaluation and control purposes.
Control System
The control system, of course, is at the heart of the any evaluation process, and is
used for setting standards, measuring performance, analysing variances, and
taking corrective action.
Appraisal System
The appraisal system actually evaluates performance and so is a part of the wide
control system. However, its significant role in evaluation, is yet to be
acknowledged. When the performance of managers is appraised, it is their
contribution to the organisational objectives which is sought to be measured. In
practice, it is difficult to differentiate strictly between the performance of individuals
and that of the organisational units they belong to. Thus, the achievement of a
department or a profit centre is the sum total, or even more, synergistically, of the
individual performance of managers and employees in the department or profit
centre. The evaluation process, through the appraisal system, measures the actual
performance and provides the basis for the control system to work.
Motivation System
The central role of the motivation system is to induce strategically desirable behaviour
so that managers are encouraged to work towards the achievement of organisational
objectives. Now, if we look at the way the evaluation process works, we will observe
Strategic Evaluation and Control 399
that its efficacy depends on the extent to which it is able to bring actual performance to
the level of the standards. In other words, the lesser the deviation of actual performance
from standards, the higher is the efficacy of the evaluation process. The motivation
system plays a significant role in ensuring that deviations do not occur, or if they do,
then they are corrected by the means of rewards and penalties. Incentive systems are
directly related to the amount of deviation. Performance checks, which are a feedback in
the evaluation process are done through the motivation system.
Development System
The development system prepares the managers for performing strategic and
operational tasks. Among the several aims of development, the most important is to
match a person with the job to be performed. This, in other words, is matching
actual performance with standards. This matching can be done provided it is known
what a manager is required to do, and what is deficient in terms of knowledge,
skills, and attitude. Such a deficiency is located through the appraisal system. In
reality, what we term as corrective action in the evaluation process is, in reality, the
taking of steps that would lead to the development of individuals who are enabled to
perform as required. The role of the development system in evaluation is, therefore,
to help strategists to initiate and implement corrective action.
Planning System
In the planning system (which is more concerned with the formulation of strategies), we
deal with the issue of ‘planning for evaluation’. Since the evaluation process is a part of
strategic management it has to be planned for. Questions such as these are to be dealt
with: who will perform evaluation? How will the information generated be used? How
much resource will be required? To what extent will control be exercised so that it is
cost-effective? And what administrative systems will be required to support the
evaluation system? Further, the evaluation processes also provides feedback to the
planning system for the reformulation of strategies, plans, and objectives. Thus, the
planning system closely interacts with the evaluation process on a continual basis.
Several additional factors should be considered with respect to control.
Control Policies
Just as organizations establish strategic and implementation policies, they must
also establish policies which guide control of the organization. Control policies
naturally evolve from the objectives and standards established for performance.
The organization must simply indicate to its mangers and other employees, what
the specific objectives are, how performance against these will be measured,
what comparisons will ensure, and how differences between expectations and
performance will be handled. Rewards must naturally be tied to results.
The organization needs policies establishing total performance measurements,
intermediate organizational level performance measurements, and work group and
individual performance measurements. Of principal concern is that the ‘what’ and
‘how’ of control is sufficiently definitive to motivate employees to perform.
400 Strategic Management
higher-so that few people can leave without taking a drop. As one employee put it:
“We’re all paid just a bit more than we think we’re worth,” At the very top, where
the demands are greatest, the salaries and stock options are sufficient to compensate
for the rigors. As someone said, “He’s got them by their limousines.”
Having bound his men to him with chains of gold, Geneen can induce the
tension that drives the machine. “The key to the system,” one of his men
explained, “is the profit forecast. Once the forecast has been gone over, revised,
and agreed on, the managing director has a personal commitment to Geneen to
carry it out. That’s how he produces the tension on which the success depends.”
The tension goes through the company, inducing ambition, perhaps exhilaration,
but always with some sense of fear: what happens if the target is missed?
Financial incentives are important reward mechanisms. They are particularly useful
in controlling performance when they are directly linked to specific activities and
results. Intrinsic, non financial rewards, such as flexibility and autonomy in the job
and visible control over performance, are important managerial motivators. And
negative sanctions, such as withholding financial and intrinsic rewards or the
tensions emanating from possible consequences of substandard performance, are
necessary ingredients in directing and controlling managers’ efforts.
The time horizon on which rewards are based is a major consideration in linking
rewards and sanctions to strategically important activities and results. Numerous authors
and business leaders have expressed concern with incentive systems based on short-term
(typically annual) performance. They fear short-term reward structures can result in
actions and decisions that undermine the long-term position of a firm. A marketing
director who is rewarded based on the cost effectiveness and sales generated by the
marketing staff might place significantly greater emphasis on established distribution
channels than on “inefficient” nurturing and development of channels that the firm has
not previously used. A reward system based on maximizing current profitability can
potentially shortchange the future in terms of current investments (time, people, and
money) from which the primary return will be in the future. If the firm’s grand strategy
is growth through, among other means, horizontal integration of current products into
new channels and markets, the reward structure could be directing the manager’s efforts
in a way that penalizes the ultimate success of the strategy. And the marketing director,
having performed notably within the current reward structure, may have moved on to
other responsibilities before the shortcoming emerge.
Short-term executive incentive schemes typically focus on last year’s (or last
quarter’s) profits. This exclusive concentration on the bottom line has four
weaknesses in terms of promoting a new strategy:
It is backward looking. Reported results reflect past events and, to some extent,
past strategy.
The focus is short term, even though many of the recorded transactions have
effects over longer periods.
Strategic gains or losses are not considered due to, among other things, basic
accounting methods.
402 Strategic Management
Investment of time and money in future strategy can have a negative impact. Since
such outlays and efforts are usually intermingled with other expenses, a
manger can improve his or her bonus by not preparing for the future.
While there are clear dangers in incentive systems that encourage decidedly short-run
thinking and neglect the longer term, there is real danger in hastily condemning short-
term measures. Arguing that managers must be concerned with long-run performance is
easy; it also may be too easy to make the mistake of concluding that short-term concerns
are not important or that they are necessarily counterproductive to the strategic needs of
the organization. Such a simplistic and quick conclusion can be dangerous. In an
effectively implemented strategy, short-term objectives or aims support, and are critical
to, the achievement of long-term strategic goals. The real problem is not the short-versus
long-term concerns of management; it is the lack of integration of and consistency
between long-and short-term plans and objectives in the control system that is vital to
the successful implementation of strategy. The critical ingredients for the achievement of
this consistency are appropriate rewards and incentives.
To integrate long-and short-term concerns, reward systems must be based on the
assessment and control of both the short-run and long-run (strategic)
contributions of key managers. An effective reward system should provide
payoffs that control and evaluate the creation of potential future performances
as well as last year’s results. Exhibit 14.9 illustrates a management reward
system tied to a five-year cycle of strategy implementation. Review and
evaluation in a specific year include both an assessment of performance during
that year and an evaluation of progress toward the five-year strategic objectives.
The annual objectives and incentives in each year can reflect adjustments.
Set up incentives based Revised annual incentive Subsequent revised
on annual (1-year) and plan based on strategy annual incentive plans
long-term (5-year) adjustments
objectives
necessary for successful implementation of the strategy. This helps integrate short-and
long-term considerations in strategy implementation by linking adjustments necessary in
supporting revised, long-term considerations to next year’s reward structure. The second
component in the management reward system in Exhibit 14.9 is an incentive based on
cumulative progress towards strategic objectives. It is shown as increasing in size or
amount over time, which reinforces a long-term, strategic perspective. Incentives
Strategic Evaluation and Control 403
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